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The Great Recession 

Profit cycles, economic crisis 
A Marxist view 

Michael Roberts 


2009 Michael Roberts 

ISBN 978-1-4452-4408-2 




7726 Great Recession — before 


Chapter 1 

Profits — the life blood of capitalism 


Chapter 2 

The property time bomb 


Chapter 3 

The time bomb is now ticking 


Chapter 4 

The perfect circle of successs 


Chapter 5 

Marx's law of profitability 


Chapter 6 

Marx and the profit cycle 


Chapter 7 

The secular decline in profitability 


Chapter 8 

The profit cycle and the stock market 


Chapter 9 

The profit cycle and Kondratiev 


Chapter 10 

The profit cycle and business cycles 


Chapter 1 1 

The profit cycle and economic recessions 


Chapter 12 

Profit cycles elsewhere 


Chapter 13 

Law of profitability and 19th century Britain 


Chapter 14 

The profit cycle and politics 


Chapter 15 

Summing it up 


Chapter 16 

Dr Pangloss rules 


Chapter 17 

From boom to slump 


Chapter 18 

The economic witch-doctor of capitalism 


Chapter 19 

Gordon's year 


Chapter 20 

Capitalism unleashed 


Chapter 21 

Equality, inequality and opportunity 


Chapter 22 

Will there be a slump? 


Chapter 23 

Reclaiming Marx's Capital 


Chapter 24 

The mass of profit and crisis 


The Great Recession — during 


Chapter 25 

Stock markets in turmoil 


Chapter 26 

More stock market nerves 


Chapter 27 

The rocky road to ruin 


Chapter 28 

Credit crunch! 


Chapter 29 



Chapter 30 

Capitalism beared 


Chapter 31 

Black swans and economic recession 


Chapter 32 

Credit crunch one year on 


Chapter 33 

Financial meltdown 


Chapter 34 

Socialism for the rich, capitalism for the poor 


Chapter 35 

A kick in the face for capitalism 


Chapter 36 

Credit crunch — who pays 


Chapter 37 

All Keynesians now? 


Chapter 38 



Chapter 39 

The Great Recession 


The Great Recession — after 


Chapter 40 

Human nature and capitalist crisis 


Chapter 41 

Cycles and crisis 


Chapter 42 

Marxist theories of crisis 


Chapter 43 

The Great Recession — is it over? 


Chapter 44 

The bankruptcy of economics 


Chapter 45 

Will there be another slump? 


Chapter 46 

A nasty Turner for the worse 


Chapter 47 

Business as usual 


Chapter 48 

What next? 


Appendix A 

Measuring the rate of profit 


Appendix B 

Accumulation and capitalist consumption 






My thanks go to Ian Ilett and Mick Brooks for their encouragement and 

constructive criticism. I also must thank the pioneering work of Alan 

Freeman and Andrew Kliman whose incisive contributions to Marxist 

economics inspired me to do this book. 

There are many others in flesh and spirit who made contributions to this 
book. I want to thank them too and have made every effort to credit or 
reference those who gave me an idea or an approach in various places. 

Of course, all the stupidities, errors and mistakes must be laid at my 


'Prediction can be very difficult, especially if it is about the future ' 

Neils Bohr 


The Great Recession 

The Great Recession started at the beginning of 2008 and finished in the 
middle of 2009. At least, that is what the US National Bureau Of Eco- 
nomic Research (NBER) reckons. The NBER has taken on the respon- 
sibility of pronouncing and measuring the start and end of each economic 
slump in the US economy. 

On its measure, the Great Recession was the longest in duration and deepest 
in contraction that the global capitalist economy has seen since 1929-32. 
Indeed, it was probably worse than the Great Depression in that it had 
even greater global impact than the long slump of the 1930s. Capitahsm 
has spread its tentacles to all parts of the earth in the last 80 years. 

From the peak of the previous boom in capitalist growth in 2007 to the 
trough of the Great Recession in mid-2009, the world economy contracted 
by 6%. In the 30 most advanced capitalist economies that are members 
of the Organisation of Economic Cooperation and Development, the drop 
in output and income was 6.5%. If you compare global output in 2009 to 
where the world economy should have reached without a slump, then the 
loss of income is even greater, at 8% (see graphic). 

Measures of the world's output loss by the US government and the IMF 


00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 
I US govt — -IMF I 


The Great Recession was even more damaging in its global impact. World 
trade during the slump fell by 25-30%, truly staggering. And the wealth of 
the world, as expressed in the value of businesses, real estate and finan- 
cial assets, like bonds and stocks and shares, plummeted by $lltm. 

The Great Recession has confirmed what those with a Marxist view of 
the world economy already knew. Capitalism, as a mode of production 
and human organisation based on profit, is subject to periodic convulsions 
of boom and slump. This is as much a fact of the capitalist system as 
evolution is a fact of nature. 

The Great Recession was not an Act of God; it was not a bolt from the 
blue; an unpredictable tsunami. It was not a random chance event in 
human development. It was not a momentary blip of instability. It was 
not caused by some outside shock to the stable and smooth path of capi- 
talist production, like plague, wars or climate change may have been to 
previous systems of human organisation. 

No, the Great Recession was a product of the dynamics of the capitalist 
system and, as such, was subject to the laws of motion of capitalist pro- 
duction. Capitalist production depends on the private appropriation of 
value generated from human labour. Production will not be sustained if it 
is not profitable. This is an exceedingly wasteful and unjust way of deliv- 
ering the needs of society. 

Profitability is the key to capitalist health. The Great Recession came 
about because profitability weakened in the years prior to the slump. There 
were unavailing attempts to keep production going, even when profits 
were waning through excessive credit and borrowing. But that just made 
the eventual bust even greater. 

The Great Recession is over. But the world capitalist system is not out of 
the woods. Profitability will not have been restored to sufficient levels to 
enable capitalism to sustain healthy growth. There is still a huge overhang 
of dead capital weighing down the system and profitability is still in a cycle 


of downturn. That will have to be liquidated in another slump, probably in 
the next five years. 

This book aims to explain why the Great Recession happened, in what 
form it took and what will happen next. As such, it is divided into three 
parts: before, during and after the Great Recession. It takes the form of a 
collection of essays, some of which have been pubhshed elsewhere and 
some unpublished. Many of these essays were written as early as 2005- 
6 and were already starting to forecast the oncoming slump, eventually 
with a reasonable degree of accuracy. At the end of each chapter, the 
date when they were written is identified. I have not updated the graphics 
as they appear in each chapter, so the reader can see how accurate the 
forecasts are as the years move towards 2009. In the latest chapters, 
some of the key graphics are brought up to date to show their progress. 

The theoretical foundation of the book is based on the analysis of capital- 
ist production developed by Karl Marx over 150 years ago. In particular, 
it is argued that Marx's most important law of capitalist motion — the 
tendency of the rate of profit to fall as capitalists accumulate capital — is 
the most powerful cause of booms and slumps in capitahst economies. 

But the book also tries to outline that there are other laws of motion con- 
nected with capitalism, driven by the underlying movement of profit, but 
nevertheless with their own cycles of development, that play a role in 
generating economic crises, particularly in their timing, duration and depth. 
Indeed, the Great Recession was so severe precisely because the troughs 
in all these cycles of motion coincided, a fairly rare event. 

This book argues that a Marxist view can provide a scientific analysis of 
capitalist production, scientific in the best sense, in that it can provide a 
causal explanation with some predictive power on what will happen next 
and when. As Friedrich Engels, Marx's long-time colleague, often said, 
the proof of the pudding will be in the eating. 

November 2009 



The Great Recession 
— before 

"There are known knowns. These are things we know that we 

know. There are known unknowns. That is to say, there are things 

that we know we don 't know. But there are also unknown 

unknowns. These are things we don't know that we don't know.'' 

Donald Rumsfeld 

"We are ready for any unforeseen event that may or may not 

George W. Bush 

"The profit motive, we are constantly being told, is as old as man 

himself. But it is not. The profit motive as we know it is only as 

old as modern man ". 

Robert Heilbroner 


Profits: the life blood 

Let's keep it simple. Profits are the lifeblood of capitalism. If a capitalist 
investor or owner of a business cannot make a profit, he or she soon 
stops investing capital or employing workers to produce things or provide 
services. It's the law of the market, say the economists of capital. 

Marxists agree with the economists. Profits are the fuel of capitalist 
production — without them there would be no production. But the apolo- 
gists of capital make two other propositions. First, they say there is no 
other system of human social organisation that works. So a profit-based 
system will continue forever. Second, a profit-based system of produc- 
tion and social organisation works for the benefit of all, maybe to differing 
degrees, but nevertheless for all. 

It is here that Marxists disagree. Marxists reckon that there are other 
systems of social organisation that have worked (in a fashion) before 
capitalism where production for profit played no role. Moreover, in the 
future, human beings can develop a social organisation that will work 
without profit-making being necessary. 

And the profit system of production and organisation, far from working 
for all, leads to huge inequalities between rich and poor, both within na- 
tions and between nations on the globe. Moreover, the capitalist profit 
system actually breeds periodic crises that generate massive unemploy- 
ment, poverty and war. 

If profits are the lifeblood of capitalism, their size and growth must be an 
excellent guide to health of the capitalist system. The bigger the profit for 
capitalists, the more likely is the capitalist system of investment and pro- 
duction to thrive, at least for a while. 

If that's right, what does that tell us about the current state of the world 
capitalist economy? Well, we can get the best figures on profits from the 


data provided in the US, the world's largest economy. And what do the 
figures show? We can most easily measure profits as share of annual 
national output (GDP). 

This is not the correct or Marxist definition of profits in a capitalist economy. 
Marxists would define profits as the surplus value produced by an econo- 
my's labour force. That surplus value is the value of annual production 
sold in an economy minus the cost to the owners of all the businesses of 
paying its workers. Also, Marxists would measure profitability against 
the cost of investing in machinery and raw materials as well as employing 
workers. The US government measure of profitability merely takes profits 
against sales, not costs. 

Even so, the official government data can still show trends in the size and 
growth of profits. That's helpful to judge the health of US capitalism. 
And what do the figures reveal? They show that US corporate profits as 
a share of GDP have moved up from lows in 200 1 to reach near record 

US after-tax corporate profits of as a share of GDP (%) 



11.0 - 




9.0 - 






R n 






levels in 2005 . But if you look over the much longer term, US profits are 
still below the levels achieved in the 'golden years' of capitalism back in 
the 1960S.1 

The profits of US companies (excluding the banks and after paying tax) 
are about 8% of total sales this year. That's much higher than the low of 
around 4% achieved in November 2001, nearly equalling the low of the 
1980-82 economic recession. The figure is now just below the peak of 
1997 which reached 9% of sales. That peak was the highest level of 
profitability reached since the 1960s, when it was common for US profits 
to be 10-12% of sales. That was truly the "golden age' of US (and world) 

The steady decline of the ability of capitalists to extract profits from their 
workforces is revealed even better when we look at the profit figures 
before tax. 

In the 1960s, US corporations achieved annual profits of 15-20% of sales. 
Then came the first post-war economic slump or crisis of 1969-70, quickly 
followed by the worldwide economic crisis of 1974-5, which signalled the 
end of the 'golden age'. In 1974, profits before tax fell to just 9% of 
sales, half the levels achieved in the golden age. Economic recovery up 
to 1978 took the profit rate back to 14% but then the 'double-dip' reces- 
sion of 1980-82 saw profitability fall back to an even lower level of 8%. 

Capitalists in the advanced capitalist economies then launched a major 
offensive against the working-class to remove all the gains achieved by 
the labour movement during the golden age. The 1980s saw the 
Thatcherite battles in the UK and Reaganite ones in the US. Trade un- 
ions were shackled and crushed. The welfare state was mutilated through 
spending cuts and privatisation of state industries. 

Even so, the profit rate only crawled up to a peak 1 0% in 1 989 before the 
next recession drove it back down to 8% again. Further attacks on the 
wages and conditions of the labour force followed with 'downsizing' (i.e. 


cutting back on the labour force and driving up unemployment). This 
helped to take profit share back up. In the late 1990s, the hi-tech revolu- 
tion also added to profitability. By 1997, before tax profits reached 13% 
— still way below the golden age, but a lot better than in 1980s. 

But the very 'mild' economic recession of 2001 was not mild for US 
capitalism. Profits slumped to 6% of sales before tax. The boom since 
then has taken them back to nearly 12%. 

But again this new peak reached this year is still below the peak of the 
1990s, just in line with that of the 1980s and still below that of 1970s. And 
of course, it is way below the golden age levels of the 1960s. 

What does this history of US profits since the 1950s tell you? It shows 
that the long-term health of capitalism is deteriorating. US capitalism, the 
rising economic power of the early 20"" century, the strongest economic 
power of the post-war period, is now getting old. Whatever, US corpora- 
tions do: cut the workforce, employ casual and temporary labour, use the 
latest hi-tech equipment, relocate to cheaper places around the globe, try 
to protect their profits with tariffs and trade restrictions, it seems that 
they cannot restore the great days of the 1960s. 

And the secular decline in US corporate profitability is mirrored in the 
figures for profits in the UK, Europe, Japan and Australia. Modern capi- 
talism is weakening. 

Marx"s great economic law of the tendency of the rate of profit to decline 
is visible in these figures. Sure, there are periods when the use of new 
technology and the ability to weaken the ability of the workforce globally 
to obtain decent wages and conditions allow capitalists to restore some- 
what their profitability. 

But that is achieved only after destructive periods of economic recession 
or slump when millions lose their jobs, small businesses collapse in their 


hundreds of thousands, or even worse capitalists engender wars to en- 
able them to get labour or resources cheaper. 

The post-war period of secular decline in profitability has been accompa- 
nied by the powerful American state overthrowing progressive anti-capi- 
talist governments in Latin America, conducting a horrifically damaging 
war in Vietnam, installing an agent provocateur state, Israel, in the midst 
of oil-rich but 'unstable' Middle East, and, of course, now occupying a 
major oil state directly with US troops. 

The huge cost, not just in lives and livelihoods for the masses, but also in 
productive resources and profits made by capitalism, was necessary — 
for capitalism. It was needed in order to try and reverse or slow the 
inevitable decline in the economic health of the system. 

Now 60 years after US capitalism became the dominant economic, politi- 
cal and military power on the globe, it has been unable to restore the 
profitability of its capitalist companies. With the next recession, profitabil- 
ity will plunge even lower depths and will require even more destruction 
and struggle to rise again. 

If profits are the lifeblood of capitalism, then the blood of US and the top 
capitalist nations keeps seeping away. Capitalists desperately suck harder 
on the labour power of the working-class globally to get more blood. And 
for a while, they succeed. The latest upturn in profitability has now lasted 
four years. But eventually, profitability will start to fall back again. 

The two great propositions of the apologists of capitalism: that is the only 
system of human social organisation that works and that it brings with it 
prosperity for all, are thus exposed. 

1. Data are from US Bureau of Economic Analysis. 

June 2005 CHAPTER TWO 

The property time bomb 

The world economy is being sustained by US consumer spending and 
Chinese manufacturing. US consumer spending is based on the illusion 
of growing property values, but these cannot keep going up forever. The 
property bubble in the US will burst and when it does it will have devas- 
tating effects on the whole of the world economy. 

The world capitalist economy is being held up like Atlas by just two forces: 
US household spending and Chinese manufacturing production. If either 
or both of these should die, then world capitalism will slip into slump. 

US household spending is probably the more important of these two fac- 
tors. What is driving this 4-5% annual growth in spending? It's not rising 
wage rates. Indeed, for the average American household, income from 
work is falling. No, what's been keeping Americans spending has been 
partly tax cuts, as Bush cuts back on social spending programmes to 
make handouts, mainly to the rich, through cuts in big business taxes, but 
also to middle-class Americans in personal tax rebates. 

But the main reason has been very low interest rates, driven down by the 
policy decisions of the US Federal Reserve Bank under Alan Greenspan. 
This has led to historically-low mortgage rates across America. As a 
result, there has been a property boom that has reached breakneck pro- 
portions, particularly in the 'hot spots' of California, Las Vegas, Florida 
and New England. 

National house prices are now rising at a 15% annual rate, unheard of in 
all previous US housing booms. This unprecedented rise in housing wealth 
has enabled Americans to refinance their debt at low rates and then use 
the cash they've borrowed to spend, confident in the belief that when 
they sell their properties they will have risen so much in value that they 
can pay off the debt comfortably. This is a house of cards. 


World capitalist growth now depends on US household spending and US 
spending depends on house prices in the US rising indefinitely. This is a 
pyramid scheme that will topple over eventually. 

As the Economist pointed out in its June 2005 issue: "Never before have 
real house prices risen so fast for so long in so many countries". The 
total value of residential property in the OECD has more than doubled 
from $30bn to $70bn in the last five years and is now equivalent to over 
100% of these countries' annual output. 

Yet this value is not represented by any new production and it is a global 
phenomenon. House values (if measured against the rents that can be 
got from property) have never been higher in America, Britain, Australia, 
New Zealand, France, Spain, Holland and Ireland'. 

This is purely a speculative bubble — a bubble bigger than the stock 
market boom of the late 1 990s that collapsed in 2000 or the great boom of 

US median home price (% yoy) growth 



CD— i-cocn^sico— *-cocn — ico— »-cocn — ico— ^-cocn 



the 1920s that ended in the Great Depression of 1929-33. The Econo- 
mist reckons it is the biggest bubble in history! 

That's proven when the US estate agent association revealed that around 
one in every four properties bought in 2004 were for investment not oc- 
cupation and another 15% were bought as second homes. In Florida, as 
many as half the buyers of property resell their purchases immediately! 
And they are financing this binge from mortgage lenders that offer 100% 
mortgages or even higher, with reduced interest payments (60% of mort- 
gages in California were like this in 2004). 

But the US housing bubble is now set to burst. According to another 
expert, average US house price rises were about 25% over trend, but in 
hot spots the level of over-valuation was more like 50%. In Los Angeles, 
the real estate association has calculated that only the top 17% of all 
wage earners can now afford the price of an average home! It does not 
matter that mortgage rates are still low. The level of prices in many areas 
is so high that hardly anybody can buy. 

The indicators of a future bust are already there from the collapse of 
other housing bubbles in Australia and more recently, the UK. The price 
levels reached in the UK and Australia coupled with rising interest rates 
finally broke the back of the housing market there. In the last 12 months, 
Australia has seen falling prices and the UK is flat at best. 

Now the US Federal Reserve is raising interest rates. Eventually that 
will seep through to mortgage rates. Then, my own calculations suggest 
that affordable housing will only be restored in the US if house prices 
drop at least 15-20% from current levels-. That spells bust! 

If that turns out to be right, tlien the US economy will drop like a stone, as 
many Americans face bankruptcy when they cannot make their mort- 
gage payments, while others will have to pull in their spending horns to 
make ends meet. 

And have no doubt that the US economy depends on this low interest- 
rate housing boom like no other The big US banks have made huge 



profits in the last few years from lending on real estate. Now 45% of all 
the profits made by the top 500 companies in the US come from the 
financial sector If the housing market collapses, that will make a huge hit 
on the profits of big business. 

Even more serious, most US mortgages are sold on by the banks to semi- 
government agencies, called Fannie Mae and Freddie Mac. Because 
they are backed by the US government, it is assumed they cannot go 
bankrupt. And these agencies have been engaged in many financial con- 
tracts; using the mortgages they hold as collateral. 

If these Americans start defaulting on their mortgages in a big way, it 
could mean that government agencies will be in trouble and require tax- 
payers to bail them out. That will slow the economy even more. Worse, 
the trouble could spread through the financial sector like a disease, bring- 
ing down a swathe of banks. 

US home affordability: the higher, the more affordable 

135 n 







Indeed, in Britain, there are already some signs of how the US housing 
market might pan out. The number of people declaring bankruptcy in the 
UK reached record levels in the first quarter of 2005, up 28% on a year 
ago. And there are record numbers of mortgage repossessions already. 

Personal bankruptcies are one-fifth higher than they were during their 
peak in the early 1990s, when the UK economy was in recession and 
almost one million households were in 'negative equity' (their mortgages 
were bigger than the sale of their property could cover). 

According to John Butler, economist at Britain's biggest bank, HSBC, 
"the vulnerability of the household sector is acting like a time-bomb, which 
will ultimately cast a shadow over the UK economy". 

Of course, the US authorities are not stupid. They are aware of the risk. 
But for the moment, they seem blithely confident that nothing will go 
amiss. Federal Reserve chairman and financial guru, Alan Greenspan, 
recently said he thought there "was some froth" in the housing market 
and some risky forms of financing, but he was sure that "the US housing 
market was not a bubble that was going to burst". 

Perhaps his serenity is due to the fact that for the richest people in the 
world, a housing bust may have little effect on their wealth. After all, it is 
the middle class, and even the working class to some extent, in the US, 
the UK and Europe, who invest any savings or credit they have into their 
house. For the very rich, property is a much smaller proportion of their 
overall wealth. Financial wealth — company shares, government bonds 
and just cash in the bank — is just as big. 

Indeed, the world's wealth is more concentrated than ever. The differ- 
ence between what the 'average' man or woman is worth and what the 
super-rich are worth has never been so great. A new Merrill Lynch study 
shows that 8.3 million people around the world now have a million or 
more dollars in 'investable assets' and this does not include their homes^. 
In contrast, for the average person, the main asset is the home. 



With $30.8 trillion at their command, the "really rich" control one quarter 
of the world's financial wealth. This translates into the following: the 
super-rich, who comprise just 0. 13% of the world's population, own 25% 
of the world's wealth! 

But very few of the super-rich made their money investing in stocks 
(Warren Buffett is one great exception and even he buys companies more 
than stocks). Most made it through inheritance, or building a business, or 
in investment banking. That means they got rich on the back of other 
people's investments. So the super-rich may not be worried by any hous- 
ing crisis. But it's an issue for the rest of us. 

The US economy is currently motoring on at about a 3.5% real growth 
rate. Last year, the UK was nearly achieving that on the back of rocket- 
ing house prices and big spending by British households as they used up 
the cash borrowed on their houses. Australia was growing at over 5%. 

But this year, the UK and Australian housing markets have slumped. 
With that, economic growth has slowed to under 2% a year. Spending in 
the shops has stopped growing altogether. 

The UK and Australian economies are not decisive in driving global capi- 
talism. But the US economy is. If it suffers a similar fate to the UK and 
Australia in the next year, the world will too. Japan's recovery is still 
stuttering, while Europe is growing painfully slowly. If the US stops spend- 
ing, then China and the rest of Asia will feel the cold draught of slowing 
export sales too. The world will go into recession. 

1. OECD Economic Outlook, April 2005 

2. US National Association of Realtors Affordability Index 

3. Merrill Lynch World Wealth Report, 2005 


February 2006 CHAPTER THREE 

The time bomb is now ticking 

One of the key elements in holding up consumer spending — and there- 
fore sales and profits — in the US has been growing house prices. The 
growing nominal value of housing has led to a widespread phenomenon 
of remortgaging, i.e. borrowing more to keep up annual family incomes. 
This cannot continue for much longer. The signs are already there that 
we are close to the limit. 

There is a property time bomb that threatens to drive the advanced capi- 
talist economies of North America and Europe into economic recession. 
There are two strong forces that were keeping world capitalism motoring 
along: US household spending and Chinese manufacturing production. If 
one of these should falter, then world capitalism would slip into slump. 

The capitalist economists remain very optimistic that neither of these things 
will happen or that they will not make any difference. And the latest 
economic data coming out of the US would suggest that all is well. 

As one American economist put it: "January was not only hot in the sta- 
tistical sense, but it was literally the hottest January on record insofar as 
US climatic conditions are concerned". US house builders increased 
their number of new housing starts by nearly 7% in one month. Sales in 
American shops and malls jumped 30% in January relative to December. 

As a result, the economists are now forecasting the US economy will 
grow at a 5% annual rate in the three months to the end of March. That 
compares to a very poor expansion of just 1.5% in the last quarter of 

But, as one sceptical American economist put it^: "Which outcome is 
closer to the true state of the US economy — the energy-shocked, con- 
sumer-led slowdown of late 2005 or the apparent heat-seeking burst of 
activity in early 2006? Financial markets have voted for the latter My 
advice is don't play with statistical fire. There may have been more truth 



to the weakness of the economy in late 2005 than most are wilhng to 
accept. The case for a post-housing-bubble capitulation of the American 
consumer remains a very real threat in 2006." 

National house prices are now rising at a 12% annual rate, unheard of in 
all previous US housing booms. This unprecedented rise in housing wealth 
has enabled Americans to refinance their debt at low rates and then use 
the cash they've borrowed to spend, confident in the belief that when 
they sell their properties they will have risen so much in value that they 
can pay off the debt comfortably. 

Recent data on US property transactions and prices show that the down- 
turn in the US housing market has now started. Existing house sales 
(roughly 80% of the market) have been edging down since last June. 
The number of unsold homes is now at its highest level since spring 1986. 

House builders are scaling back forecasts for next year. Toll Brothers, 
the largest builder of luxury homes in America, recently reduced its sales 
projections for 2006 by 4-7%. The National Association of Home Build- 
ers index portends a further deterioration in new home starts. Mortgage 
applications have also drifted south since the summer. 

Housing affordability, particularly in the coastal cities, is stretched to its 
limits. America's households are leveraged up to their eyeballs and now 
rely on rising house prices to supplement their incomes. Home equity 
withdrawal (cash generated from the rising value of homes) accounts for 
a record share of their disposable income. 

So even just a slowdown in house price rises would hit consumption. A 
recent survey of homeowners in 13 areas of sharpest home price rises 
found that one in four would have to curb spending if house prices simply 
stopped rising. Now home price increases are beginning to slow from 
previously breakneck levels. Indeed, prices of new homes just built are 

All this will sound familiar to British homeowners. The collapse of the 
house price boom in the UK (and in Australia) last year is the future for 



US homeowners. House prices don't have to fall; the increase in prices 
just has to slow to cause a big headache for many households. 

Even though tlie UK and Australia did not experience outright nominal 
house price falls; in real terms, they did. The fall in real house prices 
deducted something like 2-3% points from real spending growth in those 

UK retail sales are now growing at their weakest rate for 20 years and 
recorded the worst figures for the January sales since 1945! The Chan- 
cellor, Gordon Brown, has been forced to halve his economic growth 
projections for 2006. In Australia, real retail sales are growing just 1% a 
year and business confidence is at a three-year low. For the first time 
since New Labour came into office, unemployment is steadily rising. 

America has a new chairman of its central bank, the Federal Reserve. 
Ben Bernanke's first statement to the US Congress was to raise the 
question of a housing bust. Naturally, he was not too worried when he 
argued that "a levelling out or a modest softening in housing activity seems 
more likely than a sharp contraction." But a so-called soft landing in 
housing could still translate into a hard landing for the economy. 

The house price boom in the UK, Australia and the US has been driven 
by an accumulation of debt. At the end of 1999, UK, Australian and US 
household debt levels were similar at 69-73% of GDP. Over the previous 
ten years, debt had risen just over 1% of GDP a year. But in the last five 
years, these countries accumulated debt more than five times faster. 

On many measures, Americans would suffer more from a housing bust 
than Australians or Brits. Household debt to GDP may be higher in Aus- 
tralia and the UK, but only 30% of Australian homeowners have any 
mortgage at all, while 45% of Americans do. And when mortgage debt is 
measured against assets, Australians have only 21% of the home value 
mortgaged, while Americans have double that. As a result, it costs Ameri- 
cans around 1 8% of their household disposable income to service their 
housing debt, but just 12% for Austrahans and 10% in the UK. 



Moreover, the US financial system has become heavily linked to prop- 
erty. Commercial banks have more than half their assets in real estate. 
While property prices rose, households felt confident to borrow even more 
at favourable interest rates. And banks were happy to provide credit 
since the risk was spread against the consumer's main asset, which was 
rising in value. 

At their peak, UK and Australian citizens sucked out the equivalent of 
8% of household disposable income in borrowing on the rising value of 
their homes. In a recent report, erstwhile Fed Chairman Alan Greenspan 
calculated that US households had extracted much the same amount from 
their homes in 2004. This extra boost to incomes was key in driving the 
consumer-led boom in the UK, Australia and the US. 

The end of the UK and Australian housing boom occurred when the 
Bank of England and the Reserve Bank of Australia raised interest rates. 
That caused house prices to stop rising and there was an abrupt drop in 
equity extraction. This provided a big shock to consumer income in those 
countries. While mortgage rates in the UK and Australia are directly 
linked to the movement of short-term rates set by their central banks, this 
is not the case in the US. They do not determine mortgage rates. Indeed, 
only one-third of all US mortgages are financed on variable rates, while 
over 70% are in the UK and Australia. Even so, in the last few months 
there have been signs of an upturn in mortgage rates. 

It won't take much of a rise in mortgage rates to kill off the current US 
house price boom. That's because, according to the National Association 
of Realtors, US house prices are at their highest relative to average in- 
come for 15 years. So just a small rise in mortgage rates would make 
most US homes 'unaffordable' and home prices would have to fall. As 
US mortgage rates rise, mortgage equity withdrawal in the US will fall, 
just as it did in the UK and Australia. 

In the last two years, the US property bubble has meant that housing and 
related sectors have contributed 1.5% points to average real GDP growth 
of 3.75%. Similarly, housing-related job growth has been twice as fast as 


other sectors of the economy and has contributed nearly one-quarter of 
all net new jobs in the last two years. If annual house prices only slow to 
half the current rate of 12%, housing's contribution to private consump- 
tion growth will disappear. So the US real growth rate would fall towards 
recession levels. 

Most important, unlike the other 'Anglo-Saxon' economies, a property 
bust in the States would have a significant impact on the world capitalist 
economy. Should the current US house price growth of 12% year on 
year in the third quarter of 2005 halve in 2006, that would cut global 
output growth by 1% point at least. 

The dynamic impact of a housing slowdown on the US economy is likely 
to be much worse. Foreign investors won't recycle their capital into the 
US fixed income assets at current yields if US growth slumps. This will 
force up US interest rates. Rising mortgage rates will then compound the 
misery for households and encourage them to save more and spend less. 

So, by the end of this year, one of the legs holding up the world capitalist 
economy may have well and truly buckled. 

1. Stephen Roach, Morgan Stanley Global Economic Forum, 
February 2006 



February 2006 CHAPTER FOUR 

The perfect circle of success 

It works like this. The economies of the advanced world, as represented 
by what are called the G7 countries (the US, Japan, Germany, the UK, 
France, Italy and Canada — in that order), no longer need to make things. 
Increasingly, they just need to invent, design and market things. They can 
leave the making of things to the less developed world — in particular, 
China and other parts of Asia, Mexico and Brazil. 

Also the G7 countries (and other smaller advanced economies like Swit- 
zerland) can concentrate on financing the investment in the making of 
things in the less developed world. The banks and financial institutions 
based in New York, London and Geneva, along with Paris and Frankfurt 
can suck up the huge savings generated in China, Japan, Korea and the 
oil-rich economies of the Middle East and Russia. These savings, in the 
hands of the global financial sector, are used to buy the bonds of the G7 
governments, the bonds of the big corporations and mortgage banks and 
the shares of the major G7 corporations. 

Looking down the telescope from the other end, this means that the G7 
governments and the big corporations and the average households on the 
G7 countries can borrow huge amounts of money to finance their pur- 
chases of houses, pay for government spending on arms, education etc 
and finance the building of factories in the so-called Third World. 

It's perfect. The US now runs a huge trade deficit equivalent to 6% of its 
annual national income. It also has built up net debts with the rest of the 
world equivalent to 25% of its annual output and rising. But no problem 
— it has this deficit because it is buying containerloads of 'things' from 
China at very cheap prices to fill its shops. 

It does not need to make these things at home any more when they are 
so cheap from China, Mexico or the rest of Asia. And these things are 
being made in China by American, Japanese and European corporations 



who have transferred their factories to China and other cheap-wage, 
plentifiil labour locations. 

It all works because the export revenues generated by Chinese sales to 
the US and the rest of the G7 are put in the Chinese banks by the foreign- 
owned corporations, which promptly use the money to buy US bonds and 
other financial assets. Indeed, in 2005, the US ran up a trade deficit of 
nearly $700bn, but it received back over $900bn in credit as foreigners 
bought US government bonds, corporation bonds and mortgage bonds. 

As a result, the US financial system is flush with cash. It can lend money 
at historically very low rates of interest to Americans to buy ever more 
expensive houses or purchase ever more quantities of Chinese goods, or 
ever more clever hi-tech services from India and techno gadgets from 
Korea, Taiwan and Japan. 

Such is the perfect circle of success. So perfect is it that some strategists 
of capital are now convinced that this has guaranteed a prosperous capi- 
talist world for some time ahead. They have called it Our Brave New 

In this world, G7 capitalist companies are 'platform companies'. They 
won't make anything. "The new business model is to produce nowhere, 
but sell everywhere . . . platform companies then simply organise the or- 
dering by the clients and delivery by the producers. . . they keep the high 
value-added parts of the research, development and marketing in-house 
and farm out all the rest to external producers". 

Think of this Brave New World as a new stage of capitalism. First, there 
was the development of agricultural capitalism in the 17"' and 18* centu- 
ries in Europe and in the 19* century in the US and Japan. Then came 
industrial capitalism, pioneered by the UK at first and then adopted by the 
US, Europe and later Japan. The rest of the world was reduced to pro- 
viding the raw materials and food that enabled industrial capitalist coun- 
tries to make the things everybody wanted. 



But now has come finance capitalism (more broadly defined to include 
what Marx called the unproductive sectors of capitalism, namely, finance, 
marketing, legal services, property 'development' etc). This is how the 
G7 economies increase their wealth. They take the savings of the newly 
industrialised world and invest or spend it for them! 

Indeed, if you take the argument further, China would have no market to 
sell its TVs, toys, textiles, bras and every other item you can think of, if 
American households did not have the money or credit to buy them. What 
is important in this view of capitalism is not production, but consumption. 

It is a repeat of the ironic story first raised by the great Dutch economist, 
Bernard Mandeville way back in 1705 of the Fable of the Bees^. As he 
explained in his brilliant doggerel verse, it is not the bees (workers) that 
are important. Without the drones (the do-nothing members of the com- 
munity who just consume the honey), there would be no point to the worker 

Without somebody ready to eat you out of house and home, there would 
be no need to make any food or the shopping — it's logical, isn't it? So 
without Americans spending like there was no tomorrow, China would 
not be able to sell and it would have no place to lend its money. The US 
spender/debtor keeps the capitalist world going round, not the Chinese 

There must be something wrong with this! And there is. This whole 
view of capitalism assumes that profits are irrelevant. What is important 
is that the price of stocks and shares keep rising, the price of property 
keeps rising and that interest rates keep low, not making profits. If the 
value of your house keeps going up, you can borrow more to spend more; 
if the value of shares keeps rising, you can borrow more to invest in 
factories in China and design new things for the Chinese to make. If 
interest rates stay low, the government and others can borrow more to 
build more armaments while keeping taxes relatively low. 



This is a view of capitalism as seen by the banker or the rich consumer. 
It is not the reality of capitalism. That's because the prices of property, 
shares and government debt won't go up forever because they depend 
on something else: profits of capitalists. This is the life blood of capital- 
ism. If the profits of the big corporations start to wane, then all bets are 
off Investment into China will fall off, share prices will fall and fewer 
goods will be purchased. G7 economies will slow and move into slump. 

Profits do not come from bankers lending money, rich people buying luxury 
goods, governments selling arms or people buying houses. The profits 
have already been made. These economic actors are merely redistribut- 
ing profit made by others, namely the producers of things in the US and 
China. This is one of the fundamental discoveries of Marxist economics. 

Profits are the unpaid labour of the working class, but also they only arise 
from the sale of things made that people want. The marketing, advertis- 
ing and distribution of goods add nothing to profit; but are just a necessary 
(under capitalism) cost of making a profit for individual capitalists in com- 
petition with each other. 

Similarly, workers in public services are necessary to capitalism to keep 
the workforce healthy, educated and functioning. But they don't produce 
profits for capitalists. In that sense, they are 'unproductive' for capital- 
ism. Bankers, mortgage and insurance brokers, real estate agents and 
financial analysts may get paid huge sums but they do not make profits 
for the capitalist system, even if they do for the companies they work for. 
In that sense too, they are unproductive. 

Yet the Brave New World of capitalism now suggests that it is precisely 
these unproductive sectors of capitalism that keep the whole system go- 
ing. Buying a house in America keeps the whole world going round. 
What will prove this wrong is when the profitability of the capitalist sys- 
tem starts to fall. At present, US profitability in the whole economy is 
around 8.5% of annual output. That's very near the historic peak of the 
last 25 years of 9%. But it is now beginning to decline. 



There are three indicators of whether the Brave New World will end in 
tears. First, are US housing prices falling? If they start to do so, then the 
profit of investing US mortgage bonds for foreigners will decline and they 
will stop buying them. That will force up interest rates in the US and 
make it more difficult to finance the huge trade deficit. As of now, US 
house prices are shooting along at near 15% a year. But they have just 
started to slow. 

The second indicator will be how much the US and other G7 companies 
keep investing in China to boost profitability. If that starts to decline, then 
it means that G7 corporations have less to spend or they are worried 
about not getting enough profit out of the workers in China. In 2005, 
foreign capitalists invested $58bn in China. That's very high, but it is 
slightly less than in 2004. Just the first signs. 

Finally, there are the figures for Chinese exports to the rest of the world. 
If they start to decline, it means that G7 consumers have less money to 
spend on goods in the shops and/or foreign manufacturers are experienc- 
ing a slowdown or fall in the profits they are making from their exports. 
In 2005, exports from China were at record levels. 

So far then, the Brave New World of capitalism is still holding together It 
still seems that the bankers, property developers and arms manufacturers 
of the 07 economies are successful and profitable. But there are signs of 
fraying at the edges. 

Let's go back to Mandeville's fable. In the natural world, of course, the 
drones do have a role. They may do nothing and do not even guard the 
Queen bee. But they are the only males of the bee community and so 
they mate with the queen, thus providing a role in procreation. The worker 
bees are all female. Once mating is over, the drones are driven out of the 
hive by the worker bees and left to die. In the human world, worker bees 
are both male and female and do their own mating. So they have no need 
of drones at all! 



1. A Kaletsky, Charles and Louis-Vincent Gave, Our Brave New 
World, 2005 

2. B. Mandeville, The Fable of the Bees, 1 705 


March 2006 CHAPTER FIVE 

Marx's law of profitability 

Nobody argues that the world capitahst economy moves in a straight 
upward path. Everybody recognises that it is subject to 'turbulence', 
booms and slumps, even crises. In these periods of slump or crises, 
people's lives are disrupted, jobs are lost, businesses go bust, families are 
made homeless etc. 

Can we say why these crises come about? The orthodox bourgeois econo- 
mists say they are the result of interference in the market economy by 
the state, by monopoly power (mainly trade unions) or as the result of 
'bad' policies that do not allow capitalists the freedom to make profits 
(too high taxes or interest rates etc). There is no inherent fault in the 
capitalist mode of production that generates periodic crises in the economy. 

Followers of the Marxist economic tradition would disagree. For us, the 
capitalist system is not only unjust, unequal and barbarous. It is also shot 
through with periodic failure. 

The primary reason is that the productive forces that provide prosperity 
and a better life are only unleashed under capitalism if there is a profit for 
the owners of capital. In other words, the productive forces are privately 
owned and turned into 'capital', so society only benefits if that capital is 
invested in production. If the profit is not there, things and services that 
people need are not produced. So profits and the profitability of capital 
are key to the health of the capitalist mode of production. 

Marx argued that capitalism will suffer periodic crises precisely because 
the owners of capital will not be able to generate sufficient profits indefi- 
nitely to sustain an untrammelled growth in production and living stand- 
ards. For that reason, capitalism may be the most expansive mode of 
production seen on the earth so far, but it is also most wasteful, unequal 
and crisis-ridden. Human beings can do better. 



Why cannot capitalists generate sufficient profits indefinitely so that the 
world's productive forces can expand smoothly forever? Marx argued 
that the most important law of the motion of capitalism that explained 
periodic crises was the law of the tendency of the rate of profit to fall'. 

Of course, each capitalist business, large or small, earns a different amount 
of profits. And each earns a different rate of profit, as measured by the 
amount of profits produced in, say a year, against the amount of money 
capital that the capitalist owner had to put into the business. 

Marx argued that the only way to understand the forces at work in a 
whole economy was to aggregate all the profits and capital in all the 
businesses and come up with an average rate of profit. He then said that, 
if this average rate of profit dropped so low as to cause the capitalists to 
stop investing further in production, the economy would go into crisis. 
There would be what modem economists call a 'recession' or 'slump', 
with all that entails for jobs and living standards for the mass of working 
people and their dependents. 

What could make the average rate of profit in the capitalist economy fall 
to such a low level, and for that matter what would make it rise? Marx 
starts from the fundamental fact that nothing is created without human 
beings spending time making or delivering it. Under capitalism, however, 
that labour time has been appropriated by the owners of capital (namely 
those that own and control the plant and equipment, raw materials and 
the money to buy them). Production depends on workers, but production 
does not happen without the say-so of the owners of capital. They own 
the means of production. 

Thus, the labour time of the workers is turned into a certain value that the 
owners of capital measure against the costs of employing their workers 
and the cost of setting up the businesses and supplying the necessary raw 
materials and services. 

Only if the workers expend labour time is there any production and any 
profit. The workers get paid a certain amount for their time. The capital- 



ists own and control the product of their labour and sell it in the market. 
The difference between the revenues of those sales and cost of employ- 
ing the workforce is what Marx called the surplus-value that the own- 
ers of capital had appropriated over and above the value of the produc- 
tion paid to the workers for their time. 

From the capitalists' point of view, the capital invested in paying the work- 
ers is variable, in that the workers add more value. Marx called that 
variable capital. But the capitalists also have the costs of setting up and 
running the businesses. Factories, offices and supplies cannot add any 
production value in themselves. But they still have to be paid for. From 
the capitalist viewpoint, this is constant capital. 

In any one period, the capitalists put up money for variable capital 
(workforce) and constant capital (plant and machinery etc). At the end 
of the production period, they sell the production in the market and re- 
ceive revenues to cover their original money capital and more. The rate 
of profit is thus the surplus value (s) created by the workers divided by 
the sum of the cost of variable (v) and constant capital (c), or (s/c+v). 

Marx argued that over a whole economy, there was tendency for that 
rate of profit to fall. And indeed, after a period of time, it would fall, 
causing an economic crisis. 

Why is there a tendency for the rate of profit to fall? The reason is 
inherent in the capitalist mode of production. Capitalism is a system of 
production where individual owners of capital (or limited companies with 
lots of small owners or shareholders) compete in the market place to sell 
their goods at a profit. So there is an inherent drive to keep costs down 
relative to likely sales revenues. 

Assuming, for the moment, that the price that a business is going to get 
for its product or service is fixed by the market, then each business can 
raise (or just maintain) profits either by lowering the costs of employing 
the workforce or by lowering the costs of raw materials and offices etc. 



The latter costs are usually fixed or out of the control of the individual 
capitalist, so the big drive is to lower labour costs. 

Capitalists can do this by reducing the workforce to the minimum re- 
quired to make the business function. Or they can make an existing 
workforce work harder or longer. These measures will either raise the 
absolute size of surplus value created by the workforce or its relative 
value compared to the costs of employing the workforce (the rate of 
surplus value), or both. 

In the modern capitalist world, the most effective way of raising the rate 
of surplus value is to introduce new technology that can either reduce the 
number of workers needed or increase how much they produce in the 
same period of time, or both. The rate of surplus value will rise and, other 
things being equal, so will profits and the rate of profit. 

But other things are not equal. New technology means more money 
capital must be invested in machinery. Most important, Marx said, the 
amount of capital devoted to machinery and technology will rise relative 
to the amount of capital invested in the workforce. So there will be a 
tendency for the value of constant capital (c) to rise relative to variable 
capital (v). Marx called this ratio: the organic composition of capital, 
or c/v. 

If the organic composition of capital (c/v) rises, then, unless the rate of 
surplus value (s/v) rises as fast or faster, the rate of profit (s/c+v) will 
fall. Marx argued that under capitalism, the forces of competition and the 
drive for profit will mean that the organic composition of capital will rise. 
If it is rising, it is because capitalists are cutting back on labour and substi- 
tuting machinery. More technology may well raise the productivity of the 
workforce, but a smaller workforce will reduce the amount of value pro- 
duced, as only workers expending labour time can add value. Thus rela- 
tively more spent on technology and relatively less on labour will tend to 
reduce the amount of value produced for each unit of money capital in- 
vested. There is a tendency for the rate of profit to fall. 



However, Marx identified a whole number of countervailing tendencies' 
that could mean either the organic composition of capital would not rise 
or the rate of profit would still rise even if it did — for a while-. And that 
last point is key. The countervailing tendencies were just that. The ten- 
dency for the organic composition of capital would exert itself and so 
would the tendency for the rate of profit to fall. Eventually, such would 
be the effect on the average rate of profit and the mass of profits in the 
economy, that it would push many capitalists into bankruptcy and others 
to stop producing (as much). There would be an economic crisis. 

Of course, this is where it all gets controversial, especially among Marx- 
ist economists themselves! The first big argument is that many econo- 
mists who consider themselves Marxists reckon that Marx made such 
important theoretical errors in his explanation of the law of the tendency 
of the rate of profit to fall that it just does not hold up. 

The second big argument against Marx's rate of profit theory is that it is 
just not empirically correct. The average rate of profit has not fallen over 
time and, even more significant, the organic composition of capital has 
not risen to explain it. Marx is just plain wrong, they say. 

So with Marx wrong both theoretically and empirically, his explanation of 
economic crisis falls to the ground. The critics say we should look else- 
where for an explanation of economic crisis. Many fall back on the 
inadequate theories of the orthodox bourgeois economists or alternatively 
try to work out a bastardised Marxist version that does not rely on Marx's 
rate of profit theory. 

I hope to try and answer these critics and defend Marx"s theory of prof- 
itability and crisis both theoretically and empirically. The aim is not just to 
defend Marx, but also to show that his profit theory is both relevant and 
crucial to understanding through what stage world capitalism is currently 



The graph in the next chapter shows the movement in the average rate of 
profit and the organic composition of capital in the US since 1945. The 
US is the biggest and most important capitalist economy. As such, it 
provides the best indicator of the laws of motion of capitalism, just as 
Marx found Britain was in the 19* century. 

And this graph provides strong empirical confirmation of Marx's analysis 
of the capitalist economy and his explanation of the nature of capitalist 
crises. From it, we can draw some startling conclusions, as the next 
chapter will try to show. 

1. KMarx, Capital Vol III, Part III, Chapter 13 

2. K. Marx, Capita/ Vol 111, Part III Chapter 14. 


March 2006 


Marx and the profit cycle 

Marx's law of the tendency of the rate of profit to fall is revealed in a 
graphic showing the movement of the average rate of profit in the US 
economy between 1946 and 2005'. The graphic also shows the move- 
ment of the organic composition of capital over the same period. 

I indicated that the graphic shows several interesting things. First, the 
average rate of profit does fall under capitalism. Second, when it falls, 
the organic composition of capital rises, and vice versa, as Marx argued. 
Third, the average rate of profit was generally much higher in the period 
(the golden age) 1948-65 than it is now. Fourth, it appears that the rate of 
profit moves in waves of about 16-18years, up, then down. Fifth, if that 
is right, we are now in a wave where the average rate of profit will fall 
and by around 2015 it will be as low, if not lower than, it was in 1982. 
Sixth, that means capitalism is now in an era where economic crisis will 

The Marxist rate of profit for the US economy 1948-05 (value rate of 
profit (VROP %) and organic composition of capital ratio 

-r 2.30 





— Value rate of profit - LHS 

— Organic composition of capital - RHS 



be more frequent and more severe and the political repercussions much 

Before I start to draw out some of the conclusions from these observa- 
tions, let me explain how the data in this graph are worked out. We are 
trying to measure the rate of profit and the organic composition of capital 
by the Marxist definition. The Marxist rate of profit is defined as surplus- 
value divided by the sum of constant capital and variable capital (s/c+v). 
The organic composition of capital is defined as the ratio of constant 
capital to variable capital (c/v). 

Can we measure these value concepts in the hard-headed world of capi- 
talist economics and statistics? We sure can. There is nothing mysteri- 
ous and or metaphysical about Marxist economic categories measured in 
value terms. 

At the level of aggregates (the whole economy), the necessary data for 
the US have been compiled by the US government's Bureau of Eco- 
nomic Analysis. We can measure constant capital as the value of the 
accumulated stock of fixed assets owned by businesses. We exclude 
houses and government-owned assets. Only the "productive' assets that 
are committed by capitalists to make profits in business are relevant. 
Note that constant capital is not the annual investment made by capitalist 
businesses. It is the accumulated stock of investments over many years 
that are owned and controlled by the capitalists. It is against this accu- 
mulated capital that profits must be measured. 

We can measure the value created by the American workforce in any 
one year very simply by using the figures for national product of the US 
economy. We can also measure the variable capital, namely the cost of 
employing that workforce to make that value, as the total 'compensation' 
of employees (that includes wages and benefits). The difference be- 
tween these two measures gives you the annual surplus-value as Marx 
defined it. All these data are available for the US going back to 1925. In 
the graphic I have only gone back to the end of WWII. 



Thus the annual rate of profit is the surphis-value (GDP less employee 
compensation) divided by the sum of constant capital (fixed asset stock) 
plus variable capital (employee compensation). The organic composition 
of capital ratio is constant capital (stock of fixed assets) divided by vari- 
able capital (employee compensation). When you run the average rate 
of profit and the organic composition of capital data as a time series 
together, you get the graphic-. 

Now those of you who follow these things closely will know that these 
measures of the value rate of profit have some problems. The problem 
with using GDP, for example, is that the capitalist statisticians include 
what they call 'depreciation' in GDP. Depreciation is a measure of how 
much of the fixed assets have been used up in any one year That is not 
part of the new value created by the workforce and ought to be de- 

You can use net product instead of gross product for that or it could be 
balanced by using a measure oi gross fixed asset stock for constant capi- 
tal. Then both the top and bottom lines of the formula of the rate of profit 
(s/c+v) would include depreciation. However, for the US economy we 
only have data for net fixed asset stock, i.e. after deducting depreciation. 
Fortunately, whether you use net or gross measures, it does not really 
change the trends and turning-points shown in graphic^ 

The orthodox bourgeois economists do not use the Marxist definition. 
They measure profits more or less as accountants do for a company. 
They take total revenues, deduct the cost of producing things or services 
that are being sold (including advertising and marketing etc), then make 
estimates of the "depreciation' of machinery and plant being used; etc. 
That produces a very different measure of profit compared with the Marxist 

Also, the economists do not identify the cost of employing the workforce 
in their measure of profitability. Their measure of the 'return on assets' is 
really profit (as defined above) divided by the stock of fixed assets. In 



this way, the role of labour in creating value and surplus-value is hidden 
and lost. 

For the capitalist economists, profit is purely a return on the accumulated 
money capital invested by capitalists of things that they own (land, plant, 
machinery, stocks of raw materials). Thus it would seem that money 
invested in dead things, not living labour, produces profit. Profits go to the 
capitalists because they invested the money — it is nothing to do with the 
labour of the workforce. 

But here is the interesting thing. When you make up a graphic of the rate 
of profit defined in the way capitalist economists do, it shows very much 
the same trends over the last 20 years as the Marxist value rate of profit 
graphic and would also do if 1 took the data further back. That suggests 
the underlying validity of the Marxist definitions. 

So what does the graphic on the value rate of profit tell us? The most 
important message is that, on the whole, when the organic composition of 
capital ratio rises (right-hand scale), the rate of profit falls — and vice 

The Marxist value 

rate of profit and capitalist 

measures in the US (%) 

12.5 -r 

-r 25.0 

12.0 - 
11.5 - 
11.0 - 





- 24.0 

- 23.0 

10.5 - 


M \ ^ 

/ M 


- 22.0 

10.0 - 



/ M 

/\ i - 

- 21.0 

9.5 - 
9.0 - 



\ A 


- 20.0 

8.5 - 


\/\l \ 

- 19.0 

8.0 - 


v ~ \ /V/ 

/V "V \f 

- 18.0 

7.5 - 
7.0 - 
6.5 - 


' V 


- 17.0 

- 16.0 

1 1 1 

1 1 1 1 1 1 1 J, 1 

1 1 1 1 





g S g g 8 

CD w en 00 ->■ 


- Profit/GDP -LHS - ■ 




That is not always the case. But remember Marx's law was of the 
tendency of the rate of profit to fall. There would be periods when 
'countervailing' forces would work to overcome the downward pressure 
on the rate of profit from a rising organic composition of capital. 

But you would have to say that there is a strong inverse relationship 
between the organic composition of capital and the rate of profit in the 
US from 1946-2005. The turning points in the direction of the organic 
composition of capital ratio match very closely the opposite turning points 
of the rate of profit. 

So it would appear that Marx's causal explanation of the movement in the 
rate of profit is proven: it depends primarily on the movement in the 
organic composition of capital". That offers powerful support to Marx"s 
argument that what generates profit under capitalism is the value created 
by living labour (working people), not some mystical role for private own- 
ers of capital. 

And it also supports Marx's view that, if the amount of living labour is 
reduced relative to the amount of money invested in dead capital (ma- 
chinery and plant), then profitability will fall. Thus capitalism has an in- 
herent tendency to go into economic crisis, wasting resources and de- 
stroying people's lives. 

What the graphic also highlights is that there appears to be a profit (and 
an organic composition of capital) cycle. Over the last 60 years, that 
profit cycle has had two upwaves and two downwaves, each of about 
15-17 years. In the first wave, which I have called the Golden Age, 
profitability was very high throughout. And after falling back in the 1950s, 
it rose to reach a peak in 1965. 

From then, the organic composition of capital rose and the rate of profit 
fell to reach a low in the economic recession of 1982. The rate fell 
sharply in the first great post-war economic recession of 1974-5. But the 



seeds had been set for these falls by the steady decline in the rate of 
profitability from 1966. 

By 1982 after two big economic recessions, such was the reduction in the 
organic composition of capital, the rate of profit steadily rose, apart from 
the merest of pauses in the recession of 1990-2, up to a new peak in 
1997. This was the great period of disinflation (slowing price rises), low 
interest rates and, above all, new technological inputs from computerisa- 
tion and the internet. Thus the value of constant capital was kept down 
and employment was maximised to deliver rising rates of profit. 

But under capitalism all good things come to an end, at least for working 
people. After 1997, the rate of profit declined, at first even though the 
organic composition of capital continued to slide. This was probably be- 
cause full employment allowed the workers to pull back some of the new 
value that was being appropriated by the capitalists as profits previously. 

However, since the mild economic recession of 2001, the organic compo- 
sition of capital has started to turn up ever so slightly. Profitability contin- 
ued to rise for a while, however, just as it did for a while after the reces- 
sion of 1974-5. But the value profit rate may now have peaked. So the 
graphic still suggests that we are now in the downwave of the profit cycle 
similar to the period 1965-82'. 

Nothing in life goes in a straight line and both the long upwave and 
downwave of the profit cycle are interspersed with smaller turns (of about 
4-5 years) that go in the opposite direction to the more secular wave. 
The period of 2001-5 is one such short upturn. I shall return to these 
shorter cycles on another occasion. 

If this is all valid, then the profit cycle is telling us that capitalism will 
suffer from a falling profit rate that could go down to a low last experi- 
enced in 1982, or even lower. That would happen about 20 13- 15. So the 
next seven to eight years are going to be tough for capitalism, with ex- 



treme competitive pressures and with at least one, maybe two, economic 
recessions over that period of a severity not seen since 1974 and 1982''. 

1. The graphic has been updated to 2008. 

2. See Appendix A on page 305 for a full account of the methodol- 
ogy for measuring the rate of profit. 

3. See Appendix A op cit. 

4. See Alan Freeman, What makes the US rate of profit fall, for a 
similar analysis in 2009. 

5. The most recent data have confirmed this prognosis. 




Secular decline In profitability 

In this chapter I continue my discussion of the graphic of the previous 
chapter that shows the movement of the average rate of profit in the US 
economy between 1946 and 2005. The graphic also shows the movement 
of the organic composition of capital over the same period. 

As 1 have indicated before, the graphic shows several interesting things. 
First, the average rate of profit does fall under capitalism, as Marx predicted. 
Second, when it falls, the organic composition of capital rises, and vice 
versa, as Marx argued. Third, the average rate of profit was generally 
much higher in the period (the golden age) 1948-66 than it is now. Fourth, 
it appears that the rate of profit moves in cycles with up and down waves 
of about 16-18 years. Fifth, if that is right, we are now in a downwave, 
where the average rate of profit has a tendency to fall and by around 
2015 it will be as low, ifnot lower than, it was in 1982. Sixth, that means 
capitalism is now in an era where economic crisis will be more frequent 
and more severe and the political repercussions much greater. 

I have dealt with items one, two and four in the previous two chapters. In 
this chapter, 1 am going to consider item three, namely that it appears the 
rate of profit was high in the period 1948-66, the Golden Age, when 
capitalist economic growth was exceptionally fast, and inflation and 
unemployment were generally low. In that period, the value rate of profit 
averaged around 22%. 

But subsequent to 1996, the rate of profit has generally been lower. Even 
in what 1 call the 'recovery period" between 1982 and 1997, the value 
rate of profit averaged about 1 8%, or about 15% lower than in the Golden 
Age (see the trend line for profitability in the graphic below). If 1 am 
right about the current profit downwave that began in 1997, then the 
average rate of profit through to 2015 or so is likely to be even lower and 
the trend fall over the 70 years since 1945 will be even more. 



There seems to be a secular decline in the rate of profit around which the 
profit cycle revolves. The cause does not seem to be due to a secular 
rise in the organic composition of capital, at least over the last 60 years. 
At around 1.9, the organic composition of capital is little different than it 
was in the Golden Age. However, as we are now in a downwave for the 
rate of profit and thus an upwave of the organic composition of capital, I 
expect the ratio to finish higher (perhaps around 2.2) by 2015'. 

So what can be the cause of this secular decline? I think the answer may 
lie in the development of modern capitalism from a primarily industrial 
and manufacturing economy to one that increasingly is turning into one 
based on services, finance and property — what we can call a rentier 
economy or finance capitahsm. 

If that is right, it expresses the view that Marxists argue: namely that 
capitalism is no longer a progressive force that is developing the world's 
productive forces. Increasingly, in order to appropriate surplus-value, it is 

The Marxist rate of profit in the US, 1948-2005 (%) 


24.0 - 

23.0 - 

A A 

22.0 - 

\ / V 

21.0 - 

17^- \ 

20.0 - 

\ ~~ ~~- - /^ 

19.0 - 

\r\ ~~~ --.._/ \ z' 


\ ^j~~~~y^^ 

17.0 - 

\ / 

16.0 - 


15.0 - 






forced to divert profits from the 'productive' sectors of the capitalist 
economy into 'unproductive" sectors. 

By productive, I mean those sectors of the economy that employ labour 
that generates surplus-value, namely manufacturing, transport and 
communications. The unproductive sectors would be finance, real estate, 
marketing, advertising, government and public services like health and 

These unproductive sectors are still very necessary to keep capitalism 
going, so that it can appropriate surplus-value. Simply put, businesses 
need banks to lend them money and capitalism needs healthy and skilled 
workers to generate surplus-value, and it needs an army and police force 
to keep 'law and order'. But all these sectors do not create surplus-value 
and indeed are a cost to the 'productive" sectors of the economy. These 
unproductive sectors (and the labour force that works in them) are 
necessary, but 'unproductive'. 

Over the last century, these unproductive sectors have grown in size relative 
to the productive sectors. Capitalism has become imperialism and 
advanced capitalism has become more and more parasitic (bankers and 
landlords) on the less advanced capitalist world, like China and India, 
which increasingly produces a bigger share of surplus-value around the 
world. Capitalism is getting older and more degenerate. It has passed its 
sell-by date. 

If this is right, it should be reflected in a secular decline in the rate of 
profit, particularly in advanced capitalist economies like the US. Indeed, 
we can look for proof of this by measuring the growth in the size of the 
unproductive sectors relative to the productive sectors of the economy. 

In this calculation, I take the period from 1950 to 2005. Between those 
two dates, the rate of profit for the whole economy has declined by 15%. 
We can measure whether this secular decline is due to the surplus-value 
created by the productive sectors of the economy has been increasingly 



'siphoned off or redistributed through the circulation of capital into the 
unproductive sectors. 

Using the data provided by the US agency, the Bureau of Economic 
Analysis, we can look at the wages or compensation paid to workers in 
the unproductive sectors compared to the productive sectors during the 
Golden Age of 1948-66 and compare it with the ratio in 1997-2005^ We 
find that there has been a sharp rise. Whereas in 1948, 60% of employee 
compensation went to productive workers, by 2005 that ratio had fallen to 

If you add back the amount of profit that the unproductive sector has 
'siphoned off from the productive sector in wages in 2005, it would raise 
the overall rate of profit from just under 20% to 23%. Indeed, the increase 
in unproductive labour can explain much of the secular decline in the rate 
of profit between 1950 and2005. Around 70% ofthatfall can be attributed 
to the rise in unproductive labour. 

US rate of profit adjusted for unproductive sectors (%) 


-». IS3 NO 


ococncoNocncx)— a.-t^^ococncors3cnoo— a-J^ 

— Rate of profit 

- -Adjusted 



This method of measuring the effect of unproductive labour is a bit of a 
simplification and other Marxist economists have subtracted all the value 
produced by the unproductive sectors, not just the wages of unproductive 
workers^ But the resulting trends are not altered by my simplification, so 
my measure will suffice. 

I conclude from the results that there are two factors that change the 
profitability of capitalism. The first is the movement of the organic 
composition of capital, as we have seen. This seems to act cyclically. A 
rise or fall in the organic composition drives down or up the rate of profit 
over a 15-16 year period. This causes periodic economic recessions 
when the rate of profit falls so low that it leads to a lowering of the mass 
of profit and/or stops capitalist accumulation. There is a strong inverse 
correlation between the organic composition of capital and the rate of 

The second is more secular than even 15-16 years. Probably over the 
last century, unproductive labour has grown compared to productive labour 
But since 1945 it has really accelerated. Capitalism has become more 
unproductive in its own terms. And this can be measured in the secular 
decline in the rate of profit. 

In effect, the cycles of profitability are caused more by the organic 
composition of capital but the trend decline in profitability is more a result 
of the growth of unproductive labour under capitalism. 

However, there is a risk here of misinterpreting the development of 
capitalism with the actual cycle of boom or slump that it is passing through. 
Yes, capitalism is past its sell-by date, but it is still usable. It can still 
experience booms where economic growth and prosperity can rise for a 

Some Marxists have latched onto the secular decline in the rate of profit 
over the last 60 years as a sign that capitalism is entering a period of 
permanent economic depression". They cite the different rate of economic 



growth seen before 1975 and then afterwards. From 1948-74, the average 
rate of real economic growth (after inflation) in the US economy was 
3.85%. After 1975 to 2005, that rate was only 3.1%, about 20% slower. 

However, this estimate is misleading. If we look at economic growth in 
each of the four economic periods of upwave and downwave of profitability 
from our value rate of profit graphic, we find that real economic growth 
averaged 4% a year between 1948-65, then it fell back to 2.9% a year up 
to 1982 (a real bad period for US capitalism). Between 1982-00, real 
growth averaged 3.6%, nearly matching the 1948-74 period that many 
economists concentrate on as the Golden Age. In the current wave from 
2001, growth has slowed to just 2.6% a year and it will get slower stilP. 

So it's incorrect to view the advanced capitalist economy as sliding into 
permanent depression. On the other hand, we are seemingly into a 
downwave of profitability that started in 1997. That is already being 
reflected in a lower economic growth rate than in the upwave of 1982- 
00. As this downwave is likely to last until 2015 (interspersed as we have 
seen already with upswings like 2002-05), capitalism is going to have a 
very rough time, at least as bad as 1966-82 and probably worse. 

Average rate of real GDP growth in the US (%) 

4.5 - 
4.0 - 



3.5 - 
3.0 - 



2.5 - 

2.0 - 

1.5 - 

1.0 - 

0.5 - 

n n 

1948-65 1966-82 1983-00 




In the next chapter, I shall again look at the cycle of profit and how it 
closely connected to the cycle of the stock market — or more accurately 
how the stock cycle follows the profit cycle. 

1. It had reached 2.1 by 2008. 

2. See the Bureau of Economic Analysis website. 

3. See Fred Moseley , TTie decline in the rate of profit in the post-war 
US economy, 2000. 

4. See Anwar Shaikh, Explaining the global economic crisis, 1999 

5. It has — growth since 2001 has been 2.1% a year in the OECD 
countries up to 2008. 




The profit cycle and the stock 

In previous chapters, I have attempted to show that the average rate of 
profit does fall under capitalism, as Marx predicted. And when it falls, 
the organic composition of capital rises, and vice versa, as Marx argued. 
Most important, it appears that the rate of profit moves in cycles with up 
and down waves of about 16 or so years each. 

If that is right, we are now in a downwave, where the average rate of 
profit has a tendency to fall and by around 20 1 5 it will be as low, if not 
lower than, it was in 1982. That means capitalism is now in an era where 
economic crisis will be more frequent and more severe and the political 
repercussions much greater. 

What helps support this argument is that it appears that the prices of the 
shares of capitalist companies, in aggregate, also appear to move in cycles, 
with up and downwaves of about 16 years, very similar to the profit cycle. 
The capitalists call the upwave in stock market prices a bull market and 
the downwave a bear market. These are very long periods for broadly 
one direction for stock prices to go. So such waves can be called secular 
bull or bear markets. 

Modem capitalist companies do not on the whole raise the funds they 
need to invest in their businesses from their own profits. That would take 
too long to build up when they need to expand or need to purchase expensive 
new equipment or plant that will last years or even decades, or when they 
want to buy up another company that might help build their business. 
They need much larger amounts of capital than one or even several years 
of profit might provide. 

So capitalist companies raise extra funds really in two ways: they either 
borrow or they offer shares in the company to investors. The former 
method was the first used in capitalism and still remains the largest way 



that capitalists raise funds. Back in the early days of capitalism, people 
set themselves up to accumulate money capital and then lend it onto other 
capitalists — finance capital was bom. Lending money at a rate of interest 
was banking. 

Later, companies and even governments adopted another form of 
borrowing. They issued bonds. The purchaser of the bond paid a lump 
sum over. In return, he or she got an annual payment of interest and, 
when the term of the bond ran out, the company bought back the bond. 
In the meantime, the owner of the bond could sell that bond onto somebody 
else, perhaps at a profit. Thus the bond market was bom. 

The stock market is different from bank loans or bonds. The company 
issues shares that entitle the owner to part ownership of the company and 
thus a share of the profits. Shareholders do not automatically receive an 
annual interest payment like bondholders. They must hope that the 
company annual meeting agrees to pay a dividend (a portion of the profits) 
to shareholders. There may be no payment at all. 

Worse, if the company goes bust, they do not get the money for their 
shares back because they are last in the queue behind the bank with its 
loan and the bondholders. But if the company makes lots of money, then 
profits will be higher than anything the bondholder might get. And of 
course, shareholders can sell their shares onto others and perhaps make 
a profit. Thus the stock market is bom. 

When there is a bull market and share prices generally keep on rising, 
most shareholders can make more money by buying and selling shares 
than by any dividends they might get from holding onto shares. Thus 
speculation in the stock market is a way of making money and also of 
stimulating people to buy company shares and boost the value of any 
company. If the share price of a company rises, then it can expect to be 
able to borrow more money at better rates of interest. Indeed, it becomes 
more important what the share price is rather than what the profits are. 
Therein lie the seeds of a stock market crash. 



Companies do not survive unless they make profits or at least avoid making 
losses for any length of time. So the share price of a company will always 
bear some relation to the profits made or the profits likely to be made 
over a period of time. Indeed, the stock market is much more dependent 
on company profitability than bank loans or bonds. The latter's value is 
set by the bankers and in the case of bonds fixed in advance. 

Finance capitalists indeed measure the value of a company by the share 
price divided by annual profits. If you add up all the shares issued by a 
company and multiply it by the share price, you get the 'market 
capitalisation' of the company — in other words what the market thinks 
the company is worth. 

This 'market cap' can be ten, 20, 30 or even more times annual earnings. 
Another way of looking at it is to say that if a company's market cap is 20 
times earnings and you bought its shares, you would have to wait 20 
years of profits to get your money back! 

If profits drive the share prices of companies, then we would expect that 
when the rate of profit in capitalism rises, so would stock prices. To 
measure that, we can get a sort of average price of all the company 
shares on a stock market by using a basket of share prices from a range 
of companies and index it. That gives us a stock market index. 

So does the stock market price index move up and down with the rate of 
profit under capitalism? The answer is that it does, over the longer term 
— namely over the length of the profit cycle, although the stock market 
cycle does not coincide exactly with the profit cycle. 

As we know, the rate of profit peaked in 1965, then fell to a low in 1982. 
Then we entered a rising wave until 1997, after which we appear to be in 
a downwave. The US stock market cycle follows a similar pattern. 

That close relationship can be established by measuring the market 
capitalisation of companies in an economy against the accumulated assets 



that all companies have. The latter measures the real value of the capitalist 
economy to its owners. 

We do this for the value of the US stock market by using what is called 
Tobin's Q. The leftist bourgeois economist, James Tobin developed the 
measured It takes the 'market capitalisation' of the companies in the 
stock market (in this case the top 500 companies in what is called the 
S&P-500 index) and divides that by the replacement value of tangible 
assets accumulated by those companies (these figures are provided again 
by the US Bureau of Economic Analysis and by the S&P's data on 
company accounts). The replacement value is the price that companies 
would have to pay to replace all the physical assets that they own (plant, 
equipment etc). 

So Tobin's Q measures the value that speculators on the stock exchange 
can get over or below the actual real value of the company's assets. As 
we can see from the graphic below for the period 1948-05, Tobin's Q 
starts at about 0.33 in 1948. So the value of stock market shares was 
approximately only one-third of the real value of the assets owned by the 
companies — very cheap. It rose to nearly 1.04 in 1968. That was the 
peak of the Tobin Q then. Afterwards it fell back to just 0.19 in 1981. 

Profits and stock market cycles by Tobin's Q measure 

30 -r 




48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 
I - - - Value rate of profit - LHS Tobin's Q - RHS I 



That was the trough. From 1982, it rose to reach 1.75 in 1999. So the 
stock market value was 75% over the real value of the company's assets. 
From 1999, it fell back to 1.02 in 2002, but then rallied somewhat to 1.30 
last year. 

The graphic confirms that there was a secular bull market from 1948 to 
1968, followed by a bear market until 198 1 and then another bull market 
until 1999. So the stock market cycle appears to be about 32 years in 
length, pretty much the same as the profit cycle, although slightly different 
in its turning points. Indeed, the stock market seems to peak in value a 
couple of years after the rate of profit does. 

This is really what we would expect, because the stock market is closely 
connected to the profitability of companies, much more than bank loans 
or bonds. When the rate of profit enters its downwave, the stock market 
soon follows, if with a short lag. This all suggests that we now appear to 
be in a secular bear market that could last until 2015, pretty similar to the 
profit downwave. 

Of course, the bull and bear markets do not move in a straight line. There 
are shorter periods of about four years when, in a secular bear market, 
stock prices can rally. That is what has been happening since early 2003. 
And, of course, in a bull market, prices can fall for a few years. But at 
the end of the 16-year period, prices will be lower or at least no higher in 
a bear market and will be much higher in a bull market. 

In a bear market, the value of the stock market will be much lower than 
at the peak of the last upwave. Indeed, the trough could even be lower 
than the previous trough. If this is right, the US stock market is likely to 
fall by at least another 50% over the period up to 20151 

Apart from the stock cycle, there are other economic cycles that can 
help us calculate through what stage capitalism is moving. There is a 
long-term commodity prices cycle (first discovered by the Russian 
economist, Kondratiev). There are shorter business cycles of about four 



years that relate to the movement of raw materials and inventories (named 
after the bourgeois economist, Kitchin) and there is an increasingly 
important cycle in modem capitalism for real estate and construction 
(named after the bourgeois economist, Kuznets). In the next chapters, I 
shall try to show how each of these cycles work with the all-important 
Marxist profit cycle. 

1. James Tohin, A general equilibrium approach to monetary theory. 

Journal of Money, Credit and Banking 1969 

3. The Great Recession has seen that forecast confirmed. 


March 2006 CHAPTER NINE 

The profit cycle and Kondratiev 

In previous chapters of this series on the profit cycle, I have argued that 
profitabihty is key to the economic health of capitalism. Marx's explanation 
of the causes of the movement of profitability under capitalism is 
compelling. Simply put, he says that when the organic composition of 
capital rises (i.e. the amount of capital invested in plant, machinery and 
equipment relative to wages and benefits to the workforce), then the rate 
of profit for the capitalists will eventually fall. 

The drive for getting profit (surplus-value) out of the workforce and the 
forces of competition between capitalists will lead to a rising organic 
composition of capital. Thus the rate of profit has a tendency to fall and 
eventually it will. When it falls sufficiently low, many capitalists start to 
go bust and others stop investing and thus there is an economic crisis. 
Capitalism wastes resources, people lose their jobs and poverty ensues 
for the many. 

What the empirical evidence of the period 1946-2006 shows is that the 
organic composition of capital and the rate of profit move in cycles of 
about 16-18years. This is confirmed for earlier periods of industrial and 
financial capitahsm'. 

Also, the evidence shows that the rate of profit has declined on average 
over the last 60 years. This appears to be an indicator of the steady 
decline in capitalism's ability to develop the productive forces. Increasingly, 
in order to drive up profitability, capitalists have been forced to spend 
more on 'unproductive' activities like education and health for the 
workforce; and they continually expand their military and police forces to 
maintain the grip of the capitalist system, both nationally and globally. 

Most important, the financial sector of capitalism (banking, investment, 
insurance etc) has grown mightily as capitalism circulates more capital to 
try and extract more profit. All of these sectors have become ever more 



necessary to capitalism, but they are 'unproductive' because they create 
no surplus-value. In a previous chapter, I showed that the relative increase 
in unproductive labour versus productive labour in the US economy 
explained the bulk of this secular decline in profitability. 

In the last chapter, we looked at how the profit cycle bore a close relation 
to the stock market cycle. Indeed, the current downwave in the profit 
cycle (which I believe we entered in 1997) was followed by a peaking of 
the stock market in 2000 and a subsequent downwave, or secular bear 
market, that could last until 2016-18. 

Indeed, the value of the US stock market, despite a huge rally since 2003, 
is still below the levels reached in 2000-. And, when measured against 
the value of the physical means of production owned by the companies 
on the stock exchange (a measure called Tobin's Q), it is still lower. So 
the movement of the Marxist profit cycle and the capitalist stock market 
cycle tells us that capitalism has now entered a long period of economic 

In this chapter, I want to consider whether there are other economic 
cycles at play under capitalism that confirm this conclusion. In particular, 
it appears that capitalism has exhibited a long-term cycle or movement in 
prices of production. Just as the capitalist profit cycle appears to be 
spread over approximately 32-36 years and so does the stock market 
cycle, there also appears to be a cycle in prices that is about double that 
size, or around 64-72 years. 

This cycle was first identified properly by Nicolai Kondratiev, a Russian 
economist, in the 1920s. He noticed that there appeared to be a period 
when prices and interest rates moved up for about 27 years and then a 
period when the opposite occurred. At that time, this Kondratiev cycle 
appeared to last about 54 yearsl 

There is some evidence to suggest that this cycle existed before capitalism 
became the dominant mode of production in society. In agricultural 



economies, prices seemed to move up when population grew faster. 
Eventually, when the population pressure was too great for food production, 
there was famine etc and the population increase slowed or even fell 
back. Then prices would enter a downwave". 

Under capitalism, the Kondratiev cycle also seemed to operate as budding 
national capitalist economies started to compete for world market share 
in trade. Thus prices rose in the 16* and 17* centuries in periods of new 
discoveries and battles for control, just as debt for waging war rose. When 
these battles and debt subsided, so did prices. Thus the Kondratiev cycle 
operated on money supply rather than just on population pressure. What 
seems similar in both forms of the cycle is that the up and downwaves in 
prices and interest rates were about 27 years. 

Under modem industrial capitalism, this cycle continued, which was when 
it was identified by Kondratiev. But now it was much more closely linked 
to the levels of investment in new technology (and thus the underlying 
profit cycle) as capitalist companies competed to raise the rate of surplus 
value and sustain profitability \ It seems that the Kondratiev cycle of the 
movement in the prices of capitalist production is now in line with the 
profit cycle and the stock market cycle. 

Interest rates are a very good proxy for the Kondratiev prices cycle. If 
we look at the period from 1 946 again, the graphic shows that the level of 
the US short-term interest rate (the Fed Funds rate, it is called, as set by 
the Federal Reserve Bank, America's central bank), rose from 1946 to a 
peak in 1981 and then fell back after that. 

And 1981 is exactly the point when both the profit and stock market 
cycles turned from its downwave or bear market into an upwave or bull 
market. So, as interest rates (and prices) fell back, profitability started to 
rise and so did share prices. 

And here is the interesting thing. Many supporters of the Kondratiev 
cycle in capitalist economies argue that the peak in the cycle was in 



1974-5, about 27 years after the trough of 1946 in prices. On that basis, 
the Kondratiev downwave began in 1974 and ended 27 years later in 
200 1 . So we are now in an upwave for capitalist prices and growth that 
could last until 2028. That would be good news for capitalism. 

However, this argument does not hold up well with the evidence. The 
Kondratiev cycle now appears to be much longer''. The last peak in 
prices (interest rates) in the cycle before this one was 1920. The last 
trough was in 1946, in line with the traditional Kondratiev downwave. 
However, the latest peak was 35 years later in 1981. 

1 reckon the profit cycle is now the dominant force in all economic cycles. 
The evidence of the post-war period is that the Kondratiev cycle is now 
aligning with the turns of the profit cycle. As we are in a period where 
the rate of profit is falling and the stock market is in a bear market, then 
the Kondratiev cycle is still in a downward wave and the prices trough 
won't come until around 70 years after the last trough in 1946, or 2018. 
That spells bad news for capitalism over the next decade. 

The profit cycle and interest rates (%) 

25 - 



r 24.0 

- 23.0 

20 - 
15 - 



- 22.0 

- 21.0 

- 20.0 

10 - 



- 19.0 

A /\1 _/ \ 

» J 

^ A " 


- 18.0 

5 - 

1 1 1 1 1 1 1 1 




- 17.0 

^ v 


- 16.0 



1 c: n 


cn cr 






Fed funds rate (%) - LHS - - Rate of profit (%) - RHS 



There are two other capitalist economic cycles that add support to that 
conclusion. The most important under modem capitalism is the innovation 
cycle. The Austrian bourgeois economist, Joseph Schumpeter, a close 
reader of Marx's ideas, reckoned that the volatility of capitalism depended 
on investment in new technology. 

Marx had explained that capitalists try to boost their profits by investing 
more in new technology to save labour costs. Schumpeter reckoned that 
when capitalism went into crisis or slump, it made obsolete much of the 
old equipment and plant. Other capitalists then began to turn to new 
technology to gain advantage. So capitalist slumps eventually led to 
innovations. Schumpeter called this process 'creative destruction'^ 

So a cycle of new technology would start after a major slump, but the 
new technology would not be developed until the profit cycle moved into 
an upwave. Then there would be a take-off of the new technology. The 
next downwave would mean a setback to the new technology cycle and 
an even worse situation for capitalists depending on the old technology. 
Finally, in another new upwave for profits, the new technology would 
take over as the dominant force. In the next downwave, the new 
technology would become mature and capitalists would look for new 
systems and the whole process would start again. 

The change from innovation, take-off, maturity and decline could take 70 
years — not dissimilar to the length of the whole Kondratiev cycle and, of 
course, to two profit and stock market cycles. 

Take the post-war period. In 1946, the dominant technology that made 
the most profits for the biggest companies was the auto and electronics 
industries. These industries were in mass production in the upwave of 
capitalism from 1948-66. The downward profit wave from 1966-82 led 
to crisis for the auto-electronic industries, while there were the early 
beginnings of innovation for a new technology: computers and the internet. 
In the subsequent upwave of the profit cycle from 1982-97 and the bull 



market in the stock cycle 1982-00, the new technology took off, while the 
old industries went into serious decline. In essence. General Motors gave 
way to Microsoft. 

We are in another downwave for profitability. This coincides with a mature 
phase for the former new technology of computers and the internet. In 
each crisis or slump in this downwave, these dominant industries will 
struggle and capitalists will search for new technologies of which we 
cannot yet know (perhaps nano technology and genetics). Eventually, in 
the next upwave of profitability, due to start about 2015-18, these new 
technologies will start to take off, while the "old technology' of computers 
and digitalisation will start to decline relatively. 

So the whole cycle for the new technology of PCs and the internet would 
have lasted about 70 years, from 1966 to 2036. Of course, this assumes 
that capitalism is still with us after 20 1 8. 

1. See Chapter 13. 

2. See Chapter 9. 

3. See N Kondratiev, The long waves in economic life, 1926. 

4. See David Hackett-Fisher, The Great Wave, 1996. 

5. M Alexander, The Kondratiev cycle, 2002. 

6. The Great Recession has confirmed that the 54-year cycle has 
now lengthened to align itself with two profit cycles of 34-36 

7. J Schumpeter, Business cycles, 1939 


March 2006 CHAPTER TEN 

Profit cycle and business cycles 

"All of you know that, from reasons I have not now to explain, 
capitalistic production moves through certain periodical cycles ", Karl 
Marx to Friedrich Engels, 1865 

In a previous chapter, we looked at how the profit cycle bore a close 
relation to the stock market cycle. Indeed, the current downwave in the 
profit cycle (which I believe we entered in 1997) was followed by a 
peaking of the stock market in 2000 and a subsequent downwave or 
secular bear market in stocks that should last until 2016-18. 

In the last chapter, we considered two other important economic cycles 
under capitalism: the cyclical movement of prices and interest rates as 
discovered by the Russian economist Kondratiev and the cycles of 
innovatory technology as highlighted by the Austrian economist, 
Schumpeter. This added support to the argument that capitalism is now 
in a downwave that will mean more frequent and more severe economic 
recessions or crises than it has experienced since the 1930s or the volatile 
economic period of the 1880s. 

There are three more cycles of motion that operate under modern 
capitalism: the cycle in real estate prices and construction, the cycle of 
economic boom and slump; and the relatively short business cycle. 

The real estate cycle seems to last about 18 years from trough to trough. 
The growth cycle seems to last half that, about nine years from trough to 
trough and finally there is a shorter business cycle that seems to have a 
life of about half that of the growth cycle, of around four years or so. 

There appears to be a cycle of about 18 years based on the movement of 
real estate prices. The American economist Simon Kuznets discovered 
the existence of this cycle back in the 1930s'. We can measure the cycle 
in the US by looking at house prices. The first peak after 1945 was in 
195 1. The prices fell back to a trough in 1958. Prices then rose to a new 



peak in 1969 before slumping back to another trough in 1971. The next 
peak was in 1979-80 and the next trough was in 1991. The spacing 
between peak to peak to trough to trough varies considerably. It can be 
as little as 11 years or as much as 26 years. But if you go far enough 
back (into the 19th century), the average seems to be about 18 years. 

As the graphic shows, the last peak in US real estate prices was in 1979- 
80. Assuming an average cycle of 18 years, then house prices should 
have peaked in 1998. Instead, on the contrary, they continued to rocket 
upwards with extra vigour. Only towards the end of last year did a peak 
seem to have been reached. That would mean a cycle of 25 years — 
within range, but on the long side. 

There seems to be less variability when comparing troughs. The last 
trough was in 1991. Assuming an 18-year cycle, then the next trough in 
US house prices should be around 2009-10-. If the US house price bubble 
finally burst in 2005, we can expect US house price rises to slip back and 
fall, at least relative to overall inflation, over the next four years. 

US house price cycles (% yoy) 

16.0 - 

14.0 - 



12.0 - 




10.0 - 


\ Downwave 


8.0 - 

A / 



' \ 

6.0 - 


\ Aa 



4.0 - 


\J M^ 


1 t 

2.0 - 



n n 

O O 
O O 




The real estate cycle is clearly not in line with the Marxist profit cycle, 
the stock market cycle or the Kondratiev prices/money cycle. These 
latter cycles are products of the laws of motion of capitalist accumulation. 
They operate in the productive sector of the economy (and by that, I 
mean 'productive' in the capitalist sense, namely contributing to the 
production of value). 

In contrast, the real estate cycle operates in the unproductive sector of 
the capitalist economy. New value created and surplus-value appropriated 
in the productive sectors of the capitalist economy are siphoned off by 
the unproductive sectors as the owners of capital spend their profits and 
workers spend their wages. Housing is a big user of consumer income. 
So the cycle in house prices reflects the spending behaviour of capitalists 
and workers, not the profitability of capital. 

For these reasons, the real estate cycle has different timings in its turns 
than the profit cycle. As we saw in previous chapters, the profit cycle 
reached a trough in 1982 before rising for 15-16 years to peak in 1997. 
The stock market cycle also troughed in 1982 and than ran up to a peak in 
2000, 18 years later. In contrast, the US real estate cycle troughed some 
nine years later in 1991 and only reached its peak in 2005. The next 
trough is due no earlier than 2009. 

Clement Juglar' was the first bourgeois economist to notice a business 
cycle of about ten years although Marx and Engels had spotted it about 
the same time (see quote above) in the 1860s**. This cycle of economic 
growth and recession now seems to be about 9-10 years. That is the 
average time between trough and trough (or recession and recession) in 
the recent period. 

Capitalist economists define a recession as two consecutive quarters of a 
fall in GDP, or annual output, after taking out inflation. On that basis, 
there have been eleven such cycles since 1933^ 



If we use the real GDP growth of the US economy since 1948, the graphic 
shows that there have been seven economic recessions over the last 60 
years, with varying degrees of severity and length (columns of grey). 

In the Golden Age of post-war capitalism, there were three downturns in 
1949, 1954 and 1958, but they were very short-lived. But then this was 
the period of high or rising profitability for capitalism. 

In the period of the profit downwave from 1966-82, there was a mild 
downturn in 1970. But then followed the first worldwide simultaneous 
recession in 1974-5 and then the double-dip recession of 1980-2. Both 
recessions were severe. 

In the renewed profit upwave of 1982-97, the next economic recession 
was in 1 99 1 , nine years later than the last. It was milder than the previous 

In the current downwave of the profit cycle, there has been one recession 
so far, in 2001. This was so mild that there was no absolute fall in GDP. 

US economic recessions (real GDP growth %) 





It bears a close similarity to the mild recession of 1970 that began the 
profit downwave period of 1966-82. 

Juglar's business cycle thus seems to operate on about a 9- 10 year cycle, 
with recessions in 1959, 1970, 1980-82, 1991 and 2001. The worldwide 
recession of 1974-5 breaks up that pattern and seems to have been 
engendered by the Middle East oil crisis. If the Juglar cycle is still holding, 
the next recession should be around 2010'' and will be much more severe 
than 1991 or 2001, because capitalism is in a profit downwave. 

If we use US unemployment data to measure the cycles of growth and 
slump, we get a similar picture. The graphic shows the grey columns that 
highlight the peaks in the US unemployment rate (equivalent to an 
economic recession or trough in GDP growth). 

The peak in unemployment in the Golden Age was in 1958. Once we 
entered the downturn wave of profitability after 1966, there was a peak 
in 1 97 1 , followed by a much bigger peak in unemployment in 1 975 and an 
even bigger peak in 1982. Once the upwave in profitability began again 
from 1982, the unemployment peaks or recessions were fewer and milder. 

US unemployment rate (%) 



CD (D 

K) ai 

CX) ->■ 



The next one was in 1992 and the last one was the very mild peak of 
2002, of about the same degree as the 1971 peak, the first in the profit 
downwave of 1966-82. 

The US unemployment rate in the Golden Age remained very low — 
culminating in a trough in 1969. In the profit downwave period from 
1966-82, the next real low in unemployment was ten years later in 1979 
(although there was one briefly in 1973). Once back in the profit upwave 
period, unemployment hit a new low in 1989 and again in 2000. 

So the cycle of unemployment seems to be about ten years, especially if 
you look at the periods from trough to trough in unemployment. The last 
low in the unemployment rate was in 2000. That suggests the next low 
will be around 2009^ Then we could expect the unemployment rate to 
double over a period of about 2-3 years in an economic recession with a 
new peak in about 20 1 1 - 12. 

The Juglar cycle has different turning points from the Marxist profit cycle, 
for two reasons. First, the cycle is of the whole economy, the productive 
and unproductive sectors, including the government sector. Thus the 
movements in the profit cycle and the productive sectors of capitalism 
feed through with a lag to the rest of the economy. The turns in the profit 
cycle since the war have been in 1948, 1965, 1981 and 1997. The turns in 
the Juglar cycle were in 1958, 1971, 1980-2, 1991 and 2001. 

Second, the Juglar cycle seems to be engendered by the decisions of 
capitalists to invest in constant and variable capital (machinery and 
workers). Profitability rises and after a while businesses start to employ 
more workers. As the cycle picks up, then they decided to invest more in 
machinery. This eventually leads to a fall in the rate of profit. Once this 
affects the mass of profit for capitalists across the board, they start laying 
off labour, making machinery idle or even closing down. This crisis takes 
some time to ensure after the profitability turning point. And the recovery 
also lags the recovery in profitability. 



Finally, there is an even shorter business cycle of about 4-5 years. Joseph 
Kitchin discovered this in the 1 930s**. This cycle seems to be the product 
of even more short-term decisions by capitalists on how much stock to 
keep to sell. It seems that capitalists cannot see further ahead than about 
2-4 years. They expand production and maximise the utilisation of existing 
production capacity. In the struggle to compete, capitalist producers end 
up with more stock than they can sell. So production is slowed until 
stocks are run down. 

In the next chapter, 1 intend to explain how all these cycles or motions of 
capitalism are linked with the Marxist profit cycle based on the law of the 
tendency of the rate of profit to fall as the lynchpin of the others. From 
the evidence 1 hope to draw some conclusions about what is going to 
happen to the world capitalist economy over the next ten to 15 years. 

1. Simon Kuznets, Secular movements in production and prices, 1930. 

2. The house price trough was duly reached in 2009, with a peak 
to trough decline in prices of about 30%. 

3. Clement Juglar, Commercial crises, 1889. 

4. Karl Marx, Value, Price and profit. Chapter XII. 

5. See the National Bureau of Economic Research website. 

6. We now know that it came earlier than 2010. 

7. The low in unemployment came earlier 

8. Joseph Kitchin, Cycles and Trends in Economic Factors, Review of 
economic and statistics, 1923. 




Profit cycle and economic reces- 

In the last chapter, I explained how there were more cycles in capitalist 
economic development than just the profit cycle, or for that matter the 
bear and bull stock market cycle. Russian economist Kondratiev had 
found that prices of commodities under capitalism appeared to have a 
cycle of over 50 years divided into an upwave of half that followed by a 
downwave of similar length. This has probably lengthened to about 64- 
72 years. 

I also showed that there was a real estate or construction cycle that lasts 
about 18 years from trough to trough and an economic growth cycle that 
delivers periodic recessions or slumps about every 9-10 years. This is 
accompanied,with a short lag, by a similar cycle in unemployment. 

Two questions: are there any connections between these various cycles? 
And how do they pan out to provide a forecast for what will happen to the 
world capitalist economy over the next decade or so? 

To answer the latter question, I use the data provided for the US economy 
yet again. This is the most comprehensive and also deals with the most 
important capitalist economy in the world. In my view, therefore, it offers 
the best indication of the future. 

The answer to the first question is that the profit cycle is the key cycle 
that links the others together. Profits drive investment under capitalism. 
And investment drives growth, employment and this consumer spending. 
The motion of capitalist production starts and ends with profit. 

And when you analyse the movements of the various cycles under 
capitalism: prices, construction, output and employment, and the shorter 
business cycle of about four years, it is the profit cycle that links them. 



Take a look at the graphic below. That graphic merges all the cycles 
under capitalism since the second world war. The Kondratiev cycle is 
the longest, spanning a probable 72 years since the trough of 1946 to the 
likely next trough in 20 1 8. The next longest is the profit cycle based on 
Marx"s value rate of profit explanation of capitalism. As we have shown 
in previous chapters, this spans about 32-36 years from trough to trough. 

The last trough in profitability was in 1982 and so the next one will be 
around 2014-18. And the trough in the profit cycle of 1 982 coincided with 
the peak of Kondratiev cycle in prices. 

The stock market cycle almost matches the profit cycle in its length if not 
in its timing; not surprisingly, as stock market investments depend so closely 
on the rise and fall of profits. So in the graphic it is merged with the profit 

The next stage down in the matrix of cycles is the real estate/construction 
cycle first identified by Kuznets. That cycle is about 1 8 years from trough 

From Kondratiev to Kitchin: the cycles of capitalist motion 


46 58 70 74 82 

46 50 54 58 62 66 


74 78 82 86 91 94 98 02 06 1014 18 




to trough, about half that of the profit cycle and one-quarter of the 
Kondratiev cycle. There have been three post-war troughs in the 
construction cycle: 1954, 1973 and 1991. The next one is due in 2009. In 
other words, the current downturn in the US housing market, after its 
peak in 2005, should reach a bottom in 2009. 

The next stage down is the output and employment cycle first highlighted 
by Juglar. This appears to be nine years in length from trough to trough. 
The last trough in the post-war period was the very mild recession of 
2001. The next trough should be around 2010, with a peak in growth 
about now (2006)1. 

Finally, there is the much shorter Kitchin inventory or trade cycle of about 
4-5 years from trough to trough. The last trough was in 2002 and so we 
can expect a 'pause" in economic growth this year, with another trough in 
20 10-. 

Several things emerge form this description of the various cycles. First, it 
would seem that the length of the various cycles is divisible. In other 
words, the long Kondratiev cycle of 64-72 years can be divided downwards 
to the short Kitchin cycle of 4-5 years. Thus, there are two profit cycles 
in the Kondratiev cycle, four Kuznets cycles, eight Juglar cycles and 18 
Kitchin cycles.' 

The profit cycle is key though. The upwave in the profit cycle from 
1946-65 coincided with the upwave in the Kondratiev cycle. Thus the 
troughs in the Juglar and Kuznets cycles in the mid- 1 95 Os did not produce 
a very deep recession or downturn in economic growth and employment. 
Because the Kitchin cycle troughed also in 1958, the 'pause' was longer 
than in 1954. But high and rising profitability in an environment of a 
Kondratiev upwave was generally good news for capitalism. 

From 1965-82, the rate of profit fell. The Kondratiev cycle was still in an 
upwave of prices though. So what we got was successively worse 
economic slumps (1970, 1974 and 1980-2) alongside rising prices — in 



other words 'stagflation'. In 1974, the Kuznets, Juglar and Kitchin cycles 
troughed together In an environment of falling profitability, world capitalism 
suffered its first post-war simultaneous economic slump. 

The 1980-2 recession was so deep and long-lasting because it was when 
profitability reached lows and the Kondratiev prices cycle peaked. But 
the real estate Kuznets cycle was also at a peak, so output and employment 
fell while prices stayed up — the ultimate stagflation crisis. 

The nextupwave of profitability (1982-97) coincided with the downwave 
in the Kondratiev prices cycle, which we are still in. Thus rising profitability 
was accompanied by falling inflation, from 15% in 1982 to just 2-3% by 
the late 1990s. Rising and high profitability (by 1997) also meant that the 
Juglar growth troughs of 1 99 1 and 2001 were not nearly as deep or severe 
as 1974 and 1980-82. The Kuznets cycle troughed again in 1991, making 
the 1991 economic recession much more severe than the 2001 recession 
when the housing market in the US and elsewhere was booming. 

We are now in another profit downwave that should not bottom until 
around 2015. So output and employment slumps should be as severe and 
long-lasting as they were in 1974-5 and 1980-2. This profit downwave 
now coincides with the downwave in the Kondratriev prices cycle that 
started in 1982 and won'treach its bottom until 2018. So it is likely that 
fiiture economic slumps will not be stagflationary but deflationary. Prices 
could fall absolutely as they did in the 1930s'', the last time the profit 
downwave coincided with the Kondratiev downwave, and as they did in 
Japan in the 1990s (again in the international Kondratiev downwave). 

The next troughs in the Kuznets construction cycle, the Juglar growth 
cycle and the Kitchin inventory cycle are due in 2010. There has not 
been such a coincidence of cycles since 1991. And this time (unlike 
199 1), it will be accompanied by the downwave in profitability within the 
downwave in Kondratiev prices cycle. It is all at the bottom of the hill in 



That suggests we can expect a very severe economic slump of a degree 
not seen since 1980-2 or more likely since 1929-32, the last time all these 
cycles troughed or were in downwaves. 

And we can expect a similarly severe one about 20 1 4- 1 6, when profitability 
will have troughed and so will the Kondratiev downwave. That would be 
similar to 1884 (in the dim past) or 1946. 

The war of 1939-45 was a product of the continued failure of capitalism 
to restore its health. In my view, the fact that the largest capitalist economic 
powers of the 1930s (the US and the UK) were in a period of Kondratiev 
and profitability downwaves explains why capitalism did not seem to be 
able to recover. Its failure bred an arms race and eventually a war through 
the whipping up of nationalist fervour among the masses by the ruling 
classes of each capitalist state. The war, in turn, led to a massive physical 
destruction of capital that restored profitability. 

There is another aspect of the graphic: the innovation cycle first described 
by Schumpeter. Once a new discovery is made in technology, there are 
four phases in the cycle of innovations that set the structure of the 
techniques of production in any era: growth, takeoff, maturity and decline. 
This innovation cycle seems to last about the same time as the Kondratiev 
cycle, but its phases are best analysed as two parallel cycles. 

Let me explain. The auto and electronics industries were innovations of 
pre-I9I4. They began small growth between the great wars. After 1945 
up to 1964, mass production of autos, electrical goods and other household 
consumer items took off, while the older, heavy industries of steel, 
shipbuilding and mining matured, growing slowly. 

From 1964-82, the mass production electrical goods and autos sectors 
entered their mature phase. They dominated markets but no longer grew 
very fast. The older heavy industries went into catastrophic decline. 
And in this profits downwave phase, they increasingly did not produce 
the huge profits of the past, while the heavy industries made serious losses. 



Alongside these dominant technological sectors were new, small, but now 
growing industries around computers (big macroframes) and hi-tech 
innovations that were just in the early growth stage, having been in the 
discovery innovation stage in the 1950s. 

From 1982-00, profitability recovered, but the mass production sectors 
were saturated and started to decline: on the whole consumers in the 
advanced capitalist economies did not need more than two cars, five TVs 
or microwaves etc. Manufacturers of these faced fierce competition as 
consumers increasingly decided only on price for these commodities. This 
was now in the Kondratiev downwave too. Alongside, the new hi-tech 
sector began to take off and in this profits upwave, the returns on these 
new products (PCs, the internet, Microsoft, ecommerce) were spectacular. 

From 2000, the old mass production sectors will be in serious decline — 
at least in the top capitalist economies. And the new hi-tech sectors will 
now enter a period of maturity, where growth and profits will be low 
(especially as this coincides with the Kondratiev and profit downwaves). 

Beneath the surface, the discovery innovations of the period 1982-97 (as 
yet unclear, but probably nanotechnology, gene technology etc) will begin 
to grow into commercial sectors. But this will be in a multi-cycle 
downwave period, unlike any other previous period since the second world 
war. The 1930s downwaves delayed the real takeoff of the mass 
production sectors until afterwards. These new technologies could be 
similarly stunted. 

Our graphic shows that capitalism (at least the G7 economies) is now 
heading for a combination of troughs in all its economic cycles (the motion 
of capitalism) that will coincide about 2010. The profits cycle is in a 
downwave alongside the Kondratiev cycle. Capitalism is in its 'winter' 
period — making it very vulnerable to crisis''. 

1. The peak in growth globally was in 2007. 

2. Not much of a pause in 2006, but the trough is about right. 

3. The idea of linking all the cycles with the motion of capitalism 



was first mooted by Robert Bronson of Bronson Capital Markets 
Research in 1997. Bronson identified the stock market cycle, but 
did not link this to a profit cycle, which is key in his Stock Market 
and Economic Cycle Template (SMECT). See Robert Bronson, A 
forecasting model that integrates multiple business and stock market 
cycles, 2002. 

4. Consumer prices are now falling in Germany, the UK and some 
other OECD economies. 

5. The Great Recession was early! 

6. The idea of spring, summer, autumn and winter phases in the 
Kondratiev cycle was developed by PJ Wall — see David Knox- 
Barker, The K-wave, 1995. These seasons of the K-cycle can be 
integrated with the profit cycle: a spring phase with rising 
profitability and rising prices (1946-64); the summer phase with 
falling profitability and rising prices (1964-82); and then autumns 
with rising profitability and falling prices (1982-2000); and finally 
the winter phase with falling profitability and falling prices (2000- 




Profit cycles elsewhere 

In earlier chapters, I described how the post-war US economy exhibited 
cycles of profitability of around 32-36 years, divided into two waves, one 
showing a rise in profitability (1946-64 and 1982-97) and one showing a 
downwave (1964-82 and 1997 onwards). 

Also, each profitability downwave was accompanied by a rise in the or- 
ganic composition of capital (as defined by Marx as a rise in the value of 
the stock of capital equipment and plant owned by capitalists relative to 
the cost of employing the workforce). Conversely, when profitability was 
in its upwave, the organic composition of capital fell. Thus, Marx's basic 
law of the tendency of the rate of profit to fall appears to be confirmed 
empirically for the US economy. 

1 used the data from the US economy for two reasons. First, the US 
economy is the most developed and largest capitalist economy in the world. 
Just as Marx used the British economy in the 19* century to draw out the 
laws of motion of capitalism, so the US economy now provides the best 
evidence for the current forces driving capitalism. Second, there was a 
very mundane reason. The data available to draw conclusions from are 
so much better than for any other economy. 

But obviously, the question arises: does Marx's law of the tendency for 
the rate of profit to fall apply to other capitalist economies? In this chap- 
ter, 1 try to draw the evidence together to answer that question. 

Let's start with the last great capitalist economy of the 19"' century, the 
UK. The UK economy is also still the fourth-largest by GDP (unless you 
count the Chinese economy as capitalist). What do the data on profits 

Accurate data only go back to 1955, but it looks as though the Marx's law 
holds for the UK too\ It would appear that the downwave in profitability 



started earlier than in the US, in about 1959 to 1975, a period of 16 years. 
During that period, the organic composition of capital rose. 

Then there was an upwave in the rate of profit lasting to 1997, as in the 
US. This upwave seems to be about 22 years long, again accompanied by 
a fall in the organic composition of capital. The whole cycle from peak in 
1959 to peak in 1997 is 38 years. 

That's a slight difference from the length of the US profit cycle peak to 
peak (1964-97) of 33 years. But that is not the only difference. The 
turning points in the UK profit cycle, particularly the switch from 
downwave to upwave do appear be different. 

In the UK it was in 1975; in the US 1982, although you could argue UK 
profitability had a new trough in 1980. And since 1997, although UK 
profitability has broadly followed the same trend as in the US (a slump to 
2001 and then recovery), interestingly the organic composition of capital 
has continued its decline. 

UK: Marxist rate of profit (%) 

18 T 


-J 5.5 

17 - 



16 - 

15 - 





- 5 

14 - 
13 - 
12 - 
11 - 
10 - 
9 - 

's. .^ 

^ \ 


^ ^ 

• — 

- 4.5 

- 4 








1 1 1 1 '1 

1 1 1 1 1 II 1 1 1 



1 1 1 1 1 1 1 1 1 1 

Ol C£ 


3 S Si ^ oi a 


S S3 ^ 

I I 


Rate of profit - LHS 

Organic comp - RHS 



This may be because the UK economy has sustained relatively low un- 
employment, while UK capitalists have refused to invest more, at least 
domestically. So profitability has been falling because UK capitalists are 
being squeezed by a rising share of labour in national income, not because 
of a rising organic composition of capital. 

In other words, the rate of surplus-value in the UK must be falling even 
more than the organic composition of capital. The most likely reason is 
the very poor growth in productivity engendered by UK capitalism. 

However, unemployment in the UK is now starting to rise. The closures 
and redundancies in the ailing UK auto industry are one sign. So soon, we 
can expect the organic composition of capital to rise too-. 

Overall then, the Marxist law of the tendency for the rate of profit to fall 
appears to operate in UK capitalism but with certain national differences 
to the US. 

What about the world's second-largest capitalist economy, Japan? Here 
the evidence is much inconclusive, partly because the data are also much 

Japan: the Marxist rate of profit (%) 



■Rate of profit - LHS 

Org comp of capital - RHS 



less reliable. For a start, data are available only back to 1969 for measur- 
ing profits. Also, that data are not entirely in line with Marxist definitions^ 

With those caveats in mind, what the graphic on Japan shows is that there 
was a clear downwave from a very high level of profitability prior to 1 975 . 
From 1975 to 1988, there was what could be described as an upwave, 
with profitability being higher at the end of the period. From 1988 there 
was a clear downwave in profitability to 1998. After that, the data ap- 
pears to show that Japanese capitalism is now in a profit upwave". 

Marx"s law of profitability seems to hold for the downwave before 1975, 
with the organic composition of capital rising. In the subsequent upwave, 
it is less clear, with the organic composition rising, while profitability rose 
very shghtly. In the downwave irom 1988 to 1998, the organic composi- 
tion of capital rose, as per Marx. In the current upwave, the organic 
composition of capital has been flat.. 

The current period in Japan has been characterised by increased invest- 
ment by Japanese companies, but accompanied by sharp falls in employ- 
ment. Employment is now picking up, so expect the organic composition 
of capital to stop rising soon. Then we shall see if Marx's law is causal 
for Japan since I998\ 

There are clear differences in the Japanese profit cycle with the US one. 
First, the post-war downwave started earlier, around 1962. and the upwave 
ended earlier in about 1990 compared to 1997 in the US. Now there is an 
upwave while the US profit cycle is in a downwave. Also, the profit 
waves in Japan are different in length. We appear to have profit cycle of 
about 25 years, not 32-36 years as with the UK and the US. 

The secular trend in profitability is down, matched as it is with what could 
be considered a secular rise in the organic composition of capital. In that 
sense, Marx's law holds. 


Now let's look at Germany, the world's third-largest capitalist economy 
and the largest in Europe. Here the story gets even more opaque. The 
graphic on Germany shows that profitability rose sharply fi-om 1967 to 
1990. After that, the rise has been minimal. 

Again, the data are not nearly as reliable and accurate as the US data. 
But for what they are worth, the data show that Germany's organic com- 
position of capital fell from 1967 to 1990. So, as a result, German profit- 
ability has risen. 

Huge investment in plant and equipment in the immediate post-war period 
and high levels of unemployment drove up the organic composition to 
huge levels. But as German capitalists started to employ more workers, 
the organic composition steadily fell and the rate of surplus-value rose. 
Profitability flattened. 

The pace of the rise in profitability also slackened after 1990. That coin- 
cided with a slight rise in the organic composition of capital, again con- 
firming Marx's law to some extent. 

Germany: the Marxist rate of profit (%) 

70 T 

y 3.0 




60 - 






50 - 

- * 




40 - 


*,_/^ upwave 



- 2.0 

30 - 


-^ ■\ 


- 1.8 

20 - 


^ " * 


- 1.6 

10 - 


- - - - - 

" " - . 

' - 

- 1.2 


1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 

1 1 1 1 1 1 1 1 1 1 1 

1 n 









Rate of profit - LHS - - - Org comp of cap - RHS 



It is difficult to talk about a profit cycle for German capitalism. But if we 
try, it would appear that there was an upwave from 1967-90, or 23 years. 
Since then there has been downwave of sorts, which could last as long as 
the previous one from 1946-67. So that could come to an end in about 
2013. But these are very tendentious conclusions to reach. 

The most significant conclusions are the sharp differences in the trends in 
German capitalist profitability and that of the US and the UK. The first 
post-war profit downwave was in the period of Golden Age when profit- 
ability was rising for the war"s victors, Britain and America. 

The upwave from 1967 to 1990 does not match the upwave in the US 
(1982-97). The current downwave started much earlier than in the US or 
the UK, but it may finish about the same time as German cycle seems 
longer at about 42-46 years. 

Finally, there is China. It is very tendentious to call China a capitalist 
economy that follows the law of value. Certainly, the law of value was 
not dominant in that state-owned economy up to 1992. It may still not be 
dominant, but it is increasingly so. So I've tried to see if Marx's profitabil- 
ity law is beginning to operate there. 

If getting good data is difficult for Japan and Germany, it is almost impos- 
sible for China, given the crooked nature of the government statistics, 
apart from their rarity. So I've had to cheat again and not use accurate 
Marxist definitions to come up with some trends. 

If we dismiss the period before 1992 as still in the age of the "planned 
economy', then the post- 1992 period suggests the law of value is begin- 
ning to operate with a rise in the organic composition of capital starting to 
drive down profitability, at least up to 1999. After that, the rate of profit 
starts to rise and has picked up pace towards 2004'^. 

Since 2002, there has been a sharp rise in the organic composition of 
capital. This reflects the massive investment in fixed capital that China 



has been engaging in. This ought to drive down the rate of profit eventu- 
ally unless there is reversal in the organic composition^. 

Either way, it does appear that since the law of value in China became 
more dominant after 1992, that Marx's law on profitability has begun to 
operate with a rising organic composition of capital and a falling rate of 
profit. The decline in the rate has been about 10% while the organic 
composition has nearly doubled. 

There are some important general lessons to be drawn from this analysis, 
which I emphasise again is based on some pretty dodgy stats. The first is 
that profit cycles do appear to exist in other capitalist economies and they 
do appear to be related to or caused by Marx's law. But these cycles are 
not in the same time sequence as in the US or even have the same length. 

What are the reasons for that? One must be that, despite 'globalisation', 
world capitalism does not provide a fully 'free market' for the movement 
of capital and labour. So if a national economy has a higher rate of profit 
than another, it is not yet possible (and probably never will be) for capital 

China: the Marxist rate of profit (%) 

1.1 -1 

r ''^ 

1.0 - 



0.9 - 


\ /\ 

0.8 - 

\ / 

y'\^\..--'' / 


0.7 - 

\ / '^ 



0.6 - 
0.5 - 



78 798081 82 8384 858687 88899091 92 9394 9596 9798 99 0001 0203 04 

- - - org comp of capital - LHS rate of profit - RHS 



to flow freely into that economy and drive down profitability to a 'world 

A world economy with a world average rate of profit does not exist be- 
cause there are so many barriers still to the movement of capital, engen- 
dered by monopolies in various industries, protectionist tariffs and govern- 
ment legislation. 

Also there are many sectors of capitalist economies that do not compete 
in world markets, like building and construction, retail outlets, professional 
services etc. There is not a global market place. 

Finally, the history of economic recovery after 1945 is different for the 
imperialist US economy or the ageing UK economy, than it was for the 
reviving German and Japanese economies. Thus the cycle of accumula- 
tion and profit is different in length and timing. 

That means over the next decade, while US and UK capitalism could be 
in difficulty, Japan and China may be able to take advantage. In that 
sense, it may be true that Asia will rule the economic world over the next 
generation and further. 

1. UK national statistics office. 

2. The latest data show this. 

3. Japan's Ministry of Economy data. 

4. Updated results confirm this. 

5. Updated results confirm this. 

6. My results on China were confirmed by Zhang Yu and Zhao 
Feng in a paper delivered in Beijing in September 2006 to the 
International Forum on Comparative Political Economy of 
Globalisation, entitled "The rate of surplus value, the composition of 
capital and the rate of profit in Chinese manufacturing industry, 1978- 
2005", although Yu and Feng conclude that the organic composi- 



tion of capital was the not the driver of profitability . 
7. The latest data would suggest that the rate of profit has started 
to fall again, which might confirm a downphase in the profit cycle 
of about 17-18 years. 



Marx's law of profitability and 
19th century Britain 

By the beginning of the second half of the 19"' century, Britain was the 
leading capitalist power by some way. It had the largest share of world 
trade, particularly in manufacturing, where it was the global leader in in- 
dustrial innovation and expansion. It had a large colonial empire and mili- 
tary might to maintain it under pax Britannia. The Great Exhibition of 
185 1 marked the pinnacle of British capitalism's superiority. 

Through the second half of the 19* century, it remained the leading eco- 
nomic, financial, military and political power. But it began to decline rela- 
tive to the US, in particular, but also to Europe (France and Germany) in 
each succeeding decade up to the First World War. 

In that sense Britain between 1850 and I9I4 was in a similar position to 
the US between 1945 and now. It was the most important and advanced 
capitalist state, but its relative superiority was declining. 

Marx"s analysis of the laws of motion of capital was based primarily on 
Britain. He lived there and he used its economic data and events to un- 
derstand capitalism. So the UK was the right economy to analyse the 
validity of Marx's theory of capitalist accumulation and crisis in the late 
19"' century. 

Unfortunately for Marx and fortunately for us, we now have much better 
data about the production of value and surplus value, constant and vari- 
able capital for the UK between 1855 and I9I4 than Marx did. He had 
none and could not test any of his laws against empirical evidence, even 
when he had fully worked them out. 

Now we have the data^ If we use that data for the period from 1855 to 
19 14, we can plot the rate of profit in Marxist value terms and other 
Marxist categories like the organic composition of capital to see if Marx's 



law of the tendency of the rate of profit to fall holds for the most ad- 
vanced capitalist economy of the W^ century — as it does for the US in 
the second half of the 20"' century. 

When we do that we come up with several startling results. First, the 
Marxist rate ofprofit for the UK economy between 1855 and 1914moves 
in a cycle of about 30-plus years from trough to trough, with an up phase 
from 1855 to 187 P. This was a boom period for British capitalism and 
capitalism globally, with very few recessions and weak ones at that. It 
represents an "autumn' season in the Kondratiev cycle similar to that of 

Marx and Engels complained in their writings about just such a long boom, 
unlike the period from 1830 to 1848 which had been one of intense class 
struggle culminating in the revolutions of 1 848 — similar to period of the 
1970s, or the "summer" season of the K-cycle. 

The up phase of 1885 to 1871 was followed by a down phase from 1871 
to 1884, a period noted for frequent and deep recessions — indeed the 

The Marxist rate of profit in the UK economy 1885-1914 (%) 

9.5 - 

r i i i 

r 12.0 

9.0 - 
8.5 - 

; \ /^/ r 

\ ^i / 


- 11.5 

- 11.0 

- 10.5 

8.0 - 
7.5 - 


, , , 1 V 


- 10.0 

- 9.5 

- 9.0 

7.0 - 


Ol Ol O) 
Ol 00 ->■ 






1880s was considered a Great Depression like the 1930s, or the winter 
phase of the K-cycle. 

After 1884, we get another up phase in the rate of profit until 1899 (al- 
though it is volatile through to the mid- 1 890s). This was a period similar to 
the up phase in profitability seen in the advanced capitalist countries from 
1948-73 (a spring season in the K-cycle), with economic recovery being 
accompanied by a revival of strength in the labour movement in the UK 
after the depression decade. Marx's daughter, Eleanor was heavily in- 
volved in the rise of the new unskilled trade unions and the beginning of 
the Labour party during this period. 

Finally, there was a fall back in profitability from 1900 up to the start of the 
1914 war, in a period in which class struggle intensified, with major indus- 
trial struggles and rising political movements in Britain and also in Ger- 
many, France and America, similar to the period 1964-82 — a summer 
season in the K-cycle. Then the war cut across the class struggle and 
allowed capitalism to devalue its overhang of dead capital that had led to 
low profitability. 

The data also show that the main reason for the cycle of profitability 
under British capitalism between 1855 and 19 14 was the movement in the 
organic composition of capital. There is a significant inverse relationship 
between the organic composition and the rate of profit of about 0.4^ In 
other words, when the former goes up (over a period of years), the latter 
eventually goes down. 

That would seem to confirm the conclusions reached with the evidence of 
US profitability between 1948 and 2009. Marx's law holds again. 

1. See AJ Arnold and S McCartney, "National income and sectoral 
rates of return on UK risk-bearing capital 1855-1914", 2002. 

2. We cannot ascertain when the up phase commenced as the data 
only go hack to 1855. 

3. See data in Arnold and McCartney. 




The profit cycle and politics 

"Men make their own history, but they do not make it just as they 
please; they do not make it under circumstances chosen by them- 
selves, but under circumstances directly encountered, given and trans- 
mitted from the past. " Karl Marx, Economic and Philosophical Manu- 

In previous chapters, I showed that there was upwave and downwave in 
the rate of profit that alternated at about 16-18 year intervals. This cycle 
applied most clearly to the US and the UK, but the cycle also operated (in 
a different time sequence and duration) in Germany and Japan. 

In this chapter, I want to argue that there is a relationship between this 
profit cycle and political developments, namely in the intensity of the class 
struggle between the owners of capital and the working-class, those who 
have to sell their labour power to the owners in order to live. 

In a period when the rate of profit is high or rising, you would expect the 
intensity of the class struggle to be less and vice versa when profitability is 
falling. Why? Because when profits are high or rising, the capitalist class 
feels more comfortable and confident. The owners of capital can make 
some concessions to the working-class to keep the profits rolling. 

In a rising profit environment, employment is also likely to be rising (par- 
ticularly when the economic upwave is well under way) and economic 
recessions will be fewer and shorter The opposite is likely to be the case 
when profitability is falling: more recessions and higher unemployment as 
capitalists try to stem the fall in profitability by laying off workers or cut- 
ting their benefits. 

In the period after 1945, there was an upwave in profitability until 1964, 
then a downwave until 1982, followed by a recovery until 1997. Now we 
are in a new downwave that should last until around 2015. 



Anecdotally, we can build a political scenario in the US and the UK that 
matches that cycle. In the period of the 'golden age', once the immediate 
revolutionary upsurge in Europe, Japan and the UK (Labour government) 
subsided around 1948, politics in the US and the UK became conserva- 

From 1948 under Truman and then the Republican ex-general Eisenhower, 
the US had a right-wing administration obsessed with the 'cold war' with 
Russia and the 'reds under the beds' scares. In the UK, the conserva- 
tives under Churchill, Eden and Macmillan ruled the roost, culminating in 
Macmillan's "you've never had it so good' boast in the landshde election 
victory of 1959. Germany had a right-wing leader in Adenhauer, while 
Gaullism triumphed in France by 1958. In Italy, the corrupt right-wing 
Christian Democrats dominated and in Japan, the similarly right-wing Lib- 
eral Democrats began an interminable period of rule.. 

But once the upwave in profitability came to an end around 1964, the 
political atmosphere changed and soon became more volatile. In the US, 
there was the election of Kennedy in I960 but he followed a basically 
conservative policy like his predecessor. 

His assassination in 1963 led to the Johnson administration. Ironically, he 
was regarded as a reactionary redneck from Texas and yet his policies 
were the most 'liberal' in government spending, although he pursued the 
war in Vietnam began by Kennedy with a vengeance. During the late 
1960s and into the 1970s, America became a cauldron of opposition to the 
war, the civil rights movement erupted and trade union action reared its 

The Democrats were led by leftist leaders like Senator McGovern. The 
Republican administration of Nixon from 1968-73 may have been one of 
the most crooked and awful in US history, but it was not the most reac- 
tionary. Nixon did not attack the labour movement (instead he bribed the 
Teamsters); he even eventually ended the war in Vietnam; while taking 
the dollar off the gold standard (the ultimate Keynesian economic policy 



move). He was followed by a very 'wet' administration under Democrat 

In the UK, the mid- 1 960s saw the return of the Labour govermnent under 
Wilson, increased trade union action and a move to the left in the labour 
movement. The return of the Tories under a very mild conservative leader, 
Edward Heath, was enough to provoke a major miners strike and the 
quick return of Labour during the 1970s. Political action intensified along 
with more economic recessions, rising unemployment and inflation. 

This period of political crisis and struggle came to an end with the end of 
the profitability downwave. Capitalist profitability rose as the severe eco- 
nomic slump of 1980-2 weakened the labour movements of the US and 
the UK so that corporations could draw on cheaper labour and reduce 
production costs. That coincided with the arrival of more reactionary and 
conservative governments. 

In the UK, after Wilson resigned in 1976, the Labour government under 
Callaghan and Healey moved to the right as UK profitability headed for 
lows. Callaghan renounced Keynesianism in a famous speech to the La- 
bour conference and imposed heavy public spending cuts. He paved the 
way for the return of the Tories in 1979. 

The Tories were led by Thatcher from 1979-90, followed by Major up to 
1997. I don't need to tell British readers what Thatcherism meant for the 
working-class. Suffice it to say that the defeat of the miners in 1984-5 
was as much apolitical turning point leading to a long period of reaction 
as the 1982 economic recession was the beginning of new era of rising 
profitability for the capitalist system. 

It was Reagan in the US from 1980 to 1988 (with his huge spending on 
weaponry and his crushing of the labour movement starting with the air 
traffic control workers), followed by George Bush senior, who took the 
country into another war, this time against Iraq. The Clinton era was little 



different despite the label of a Democrat administration, engaging in more 
wars than any previous US administration. 

Just as in an era of falling profitability the Republican Nixon administra- 
tion was quite 'Keynesian' in its spending and labour movement policies 
and protectionist in trade, so in the era of rising profitability, the Democrat 
Clinton was conservative in government spending, anti-labour and 'free 
trade'. Similarly, the Blair Labour government was 'new' and very anti- 
trade union, pro-US and war-mongering in the Balkans and Iraq at the 
same time. 

The upwave in profitability appears to have come to an end in 1997 in both 
the US and the UK. Since then, the rate of profit (at least expressed in 
Marxist terms) has not got back to the level of 1997, despite a rally since 
2002. If we are now in a downwave of profitability, then it seems likely 
that the years of political reaction are over. 

From here, the level of the class struggle should heighten and there will be 
governments elected that will be unable to follow outright pro-business 
policies. The labour movement should revive and move increasingly to 
the left over the next decade as economic recessions of the severity of 
1974-5 and 1980-2 are repeated. The days of Bush and Blair are num- 

The thesis is that when profitability is rising (and particularly when it is 
high and reaching its peak), capitalism has openly right-wing governments 
(Churchill 1953 to Macmillan 1964 or Truman 1948 to Eisenhower I960; 
or in the second upwave: Reagan in 1980 to Bush Jnr in 2004 or Thatcher 
in 1979 to Blair in 2005). Bourgeois politicians and commentators be- 
come boastful and confident about capitalism as the only successful sys- 
tem of human organisation (free trade, privatisation, anti-Keynes). The 
labour movement becomes relatively passive and the ideas of Marxism 
and socialism weaken. 



Alternatively, when profitability is declining and particularly when it is reach- 
ing its low, then capitalist governments are shamefaced or 'liberal' or 
'reformist', even anti-big business (Wilson 1964 to 1976 for the UK or 
Johnson in 1 964 to Carter in 1 980 in the US). At the same time, the labour 
movement becomes very active and socialist and revolutionary ideas be- 
come much stronger, while capitalist ideology is watered down and lacks 
confidence (the ideas of Keynesianism and the mixed economy and pub- 
lic services strengthen). 

Of course, this is a generalised account and approximate. Clearly, the 
turning points and periods of the profit cycle do not match exactly the 
politics of capitalism and the class struggle. One obvious example is that 
both Bush Jnr and Blair are still in office, nearly ten years since the profit 
cycle turned into its downwave. That is because the political cycle and 
minds of people often lag the economic reality. 

Also, we are still early into the downwave, which should have at least 
another decade to run. Just as there was only a mild economic downturn 
in 1 970, six years into the profitability downturn and the first big recession 
did not come until 1974, so we have had only a mild downturn in 200 1 and 

mber of industrial disputes involving more than 1000 workers in 




next big recession is still brewing up (2009-10?). Politics will follow the 
economics as well as vice versa. 

It is difficult to get the timing of these political turning points right. But we 
can try to put some facts together to see if there are any signs of political 
turnings to match the change in the profit cycle. 

One of the best measures of the intensity of the class struggle is the level 
of strikes and industrial disputes, for which there are very good historical 
data. The graphic below shows the number of work stoppages in the US 
since 1947. 

What the graphic reveals is that in the periods of upwave in profitability 
(1948-64 and 1980-1997), work stoppages declined to new lows. In the 
periods of declining profitability (1 964- 1 979), the number of work stop- 
pages rose and stayed at a high level. But this argument must be tem- 
pered by the length of the decline in stoppages, over 23 years since 1980. 
There is just a sign of a pickup in industrial action in the last two years. 

Days lost in industrial disputes in the UK 

30000 - 
20000 - 




It is a similar story in the UK, where the period 1966-84 saw an unprec- 
edented level of industrial action. However, since the defeat of the min- 
ers in 1985, days lost in industrial action have fallen to record lows. 

When the working-class becomes more active in struggle, it forces the 
governments of the capitalist system to 'reform" or to concessions. Thus, 
as capitalist profitability moved into a downwave after 1964 and the Ameri- 
can labour movement and working class became more antagonistic to the 
capitalist system, successive administrations tried to accommodate them 
by allowing public spending to rise, as the graphic below shows. 

Of course, much of this extra spending was on arms in wars against Viet- 
nam and in the arms race against the USSR. But it was also the period of 
the Great Society programme of Johnson 1964-68. Even under Nixon 
and Carter later, the spending was increased. Eventually, capitalist politi- 
cians came to power determined to reverse 'Keynesianism" and the la- 
bour movement, which they saw as destroying profitability. 

After a deep recession in 1980-2 that weakened the working class, Reagan 
and the first George Bush after him attacked the labour movement and 

US government expenditure as a % of GDP 

24 - 



23 - 
22 - 


Crisis period / 



21 - 




20 - 

A / 



19 - 



'^ vJ 

Recovery \ 


18 - 



17 - 

1 1 1 

1 1 

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 

1 1 1 1 1 1 1 




then began heavy cuts in social spending, designed to switch resources to 
productive sectors of capitahsm. 

Under the new downwave of capitalism since 1997, the two-term Bush 
administration has again reversed that 'small government' policy. Sure, 
much of the increased spending is for arms and wars in the War Against 
Terror, but Bush has also not tried any longer to hold back on certain 
social spending like Medicare as he steadily loses popularity. The process 
of rising government expenditure will continued 

So the political cycle of labour movement struggle and capitalist govern- 
ment spending in countries like the US and the UK broadly matches the 
movement of the profit cycle. If that is right, then, as profitability falls 
over the next decade and we experience more economic recessions, ex- 
pect rising labour movement action and more spending by governments to 
placate the working class. 

1. Under Obama in the US and Brown in the UK, public spending 
has rocketed to deal with the Great Recession in a Keynesian way. 



Summing it up 

This chapter tries to sum up all that has been said so far. 

I started from the premise expressed by Marx that the tendency of the 
rate of profit to fall was the most important law of the motion of capital- 
ism. Marx argued that capitalism is still the most dynamic mode of pro- 
duction that human beings have yet lived under. But capitalism does not 
move in a straight line. Economic growth leaps forward at some times, 
along with employment and prices. At other times, production slows or 
even falls back absolutely and prices rocket or fall along with employ- 

How do we know where capitalism is going? The law of the tendency of 
the rate of profit to fall under capitalism is the most important in explaining 
and predicting the motion of capitalism. 

As I explained in an earlier chapter, Marx's law is as follows. If the 
organic composition of capital rises on a sustained basis, then the rate of 
profit will eventually fall. The organic composition of capital is defined as 
the amount spent by capitalists on plant, equipment and raw materials 
relative to that spent on the labour force. The rate of profit is defined as 
the amount of surplus-value produced by the workforce employed by the 
capitalists divided by the total cost of production for the capitalists in plant, 
equipment and the workforce. In other words, a rising organic composi- 
tion of capital means that constant capital is increasing faster than vari- 
able capital. 

I wanted to find out if Marx"s law holds. I measured the organic compo- 
sition of capital and the rate of profit under Marx's definition using the 
statistics from the US at first. Later I looked at other capitalist econo- 
mies. I found that if the organic composition of capital rose, then, on the 
whole, the rate of profit fell. Marx's law is confirmed. 



But more than that, I found that there was a profit cycle, under which the 
organic composition of capital would fall for about 16-18 years before 
reversing and rising for about 16-18 years. The rate of profit moved 
inversely to the movement of the organic composition of capital. 

I reproduce the graphic for the US (yet again!). 

But the evidence also showed that over the whole post-war period, the 
rate of profit fell. Each peak in the profit rate in the cycle was lower than 
the previous one. There appeared to be a secular decline in the rate of 
profit as well as a cyclical law of motion^ The best explanation for this 
was that increasingly mature, late, imperialist capitalism was becoming 
more 'unproductive' in its own terms. In other words, more and more 
labour was being employed in sectors of the economy that did not gener- 
ate surplus-value, but merely either circulated it or helped to make sure 
that productive sectors functioned-. 

Thus, the finance and property sectors, the government sector, the armed 
forces, the layers of advertising, marketing, and promotional employees: 
all these seemed "necessary" to capitalism working, but were unproduc- 

US rate of profit and organic composition of capital 




r 2.30 

21.0 - 

/ \ ''\ 

. Crisis '' 

^ Recovery 





- 2.00 

16.0 - 
15.0 - 

Golden age -s. 

r- J \ 

l—~J^ - s 

- 1.90 

- 1.80 

14.0 - 

.^^ . -J 

1 1 1 1 1 

1 1 1 1 

V 1.70 



Value rate of profit - LHS 


Organic composition of capital - RHS 



tive. With more and more labour in these sectors relative to productive 
sectors, the rate of profit would be lowered. 

The key prediction that flowed from the profit cycle was that capitalism 
(at least US capitalism) was now in the early stages of a profitability 
downwave that was set to last until the rate of profit bottomed again, say 
around 2015-18. 

Marx was right in saying that the tendency of the rate of profit to fall is the 
most important law of capitalist motion. From it flows all the other cycles 
of capitalist economic and social relations. And there are other cycles, 
including the cycle of boom and slump. 

The capitalist stock market moves in cycles of bull upswings and bear 
downswings. This stock market cycle matched that of the profit cycle 
almost exactly. Thus capitalism (at least US capitalism) is now in a bear 
market for stocks and shares, where stock prices will continue to decline 
(not in a straight line) from a peak achieved in 2000 until a new trough 
around 2018. 

Most interestingly, the long-known Kondratiev economic cycle of the 
movement of prices of production under capitalism also coincides with the 
movement of the profit cycle. In the post-war period, the Kondratiev 
cycle peaked in 1980, at the same time as the profit cycle troughed. The 
Kondratiev cycle (which is about double the length of the profit cycle of 
32-36 years) is now in a downwave and we entered a new downwave in 
profitability in 1997. 

Other economic cycles are not synchronised with the Kondratiev, profits 
or stock market cycles. The building and construction cycle completes 
over 18 years, half that of the profits cycle, but with different turning 
points. The troughs in the US building cycle were in 1973, 1991, with next 
due in 2009-10'. 



Similarly, the cycle of economic growth and employment appears to be 
about half that of the building cycle and one-quarter the length of profits 
cycle, again with different turning points, but due for the next trough or 
'recession' in about 2010. 

Indeed, what the evidence shows is that many of the economic cycles of 
capitalism are coinciding with troughs about 20 10 in an economic environ- 
ment of a Kondratiev price downwave and a profitability downwave. This 
augurs for a very ugly economic crisis in 2009-10, perhaps not seen since 
the IQSOs". 

I also looked at other profits cycles apart from that in the US. I found a 
similar cycle for the UK with fairly similar turning points. In contrast, 
Japan and Germany had different cycles, with Japanese capitalism appar- 
ently in a profitability upwave that began in 1998, while Germany is in the 
middle of a downwave that began nearly a decade ahead of the downwave 
in the US and the UK. 

But the evidence, such as it is, suggests that most of the biggest capitalist 
economies will follow the US into economic crisis, as the pressures of a 
falling rate of profit exert themselves. 

Finally, we made some tentative suggestions that flow and ebb of the 
profit cycle also had an impact on the intensity of the class struggle be- 
tween the working-class and the capitalist class. When the profits cycle 
was in an upwave and capitalism looked healthy, its leaders were more 
confident; in contrast, workers were more passive and accepted the sys- 
tem as they tended to get more jobs and better living conditions. 

Thus, in what we can call the Golden Age of capitalism after the second 
world war up to about 1964, most capitalist states had conservative gov- 
ernments that promoted the benefits of the 'free market' while the labour 
movement was relatively quiet. Socialism and militant trade unionism 
was broadly absent. 



However, once the profits cycle entered a downwave and particularly as 
economies experienced successive economic recessions, labour disputes 
rose and governments came to office pledged to 'reforms' to improve 
things and control 'the ugly face capitalism'. Capitalists felt less secure 
and adopted more unorthodox theories that were even anti-capitalist. 
Socialist ideas and militant trade unionism flourished. 

After over 20 years of reactionary politics, driven by a rising rate of profit 
from 1982-1997, improved economic growth and milder economic reces- 
sions that restored capitalist confidence and weakened socialist idoelogy, 
the US and most of the world capitalist economy has entered a new 
downwave in profitability. 

Once the full impact of this downwave begins to bear down on economic 
growth, employment and living standards, then the intensity of the class 
struggle will rise again to levels not seen since the 1930s and 1970s. 

That is where we are going: a falling profit rate to a new low around 20 14- 
16; a series of economic recessions (at least two, in 2009-10 and 2019-20, 
and possibly more) at least as severe as those of 1980-2; and a new wave 
of political struggle against capitalism similar to that seen in the 1930s and 
the 1970s. 

1. Andrew Kliman 's brand new analysis on the US rate of profit 
also confirms this secular decline. See appendix A on measuring 
the rate of profit. 

2. This is not Kliman 's view but closer to that of Fred Moseley. 

3. This was confirmed with the bottoming of the housing crash in 
the UK and the US around late 2009. 

4. It came a little earlier with the Great Recession troughing in mid- 




Dr Pangloss rules 

The Financial Times recently claimed the British economy has been do- 
ing rather well out of globalisation. But a closer look at the figures shows 
that what we have before us a growing polarisation, with the rich getting 
richer and the poor poorer. On a world scale, the position is even worse, 
which may possibly explain the growing instability all across the globe. 

All is well — at least that is how the Financial Times reviews the state of 
the UK in a September editorial. Entitled "New Britain faces the world 
with confidence", the editorial starts with a confident assertion: "Though 
it has its problems, Britain is in good shape... the overall sense is one of 
progress and success". 

And the primary reason, according to the FT, is globalisation. "It was 
globalisation, the vast expansion of world trade and migration during the 
19th century, that brought Britain's greatest era of success... future gov- 
ernments must do as this government has done and let globalisation hap- 

This Panglossian view of Britain and the world comes from the mouth of 
the leading forum of British capitalism, of course. Also, it is probably no 
coincidence that the editorial was written as New Labour holds its annual 
conference (possibly the last as 'New Labour'). 

Former FT economic leader writer and correspondent, Ed Balls, now an 
MP and Chief Secretary to the Treasury, Gordon Brown's right-hand man 
and likely future successor to Gordon as Chancellor of the Exchequer, 
may well have his writing hand in this piece. Britain's so-called economic 
success is the key selling point for Gordon in his quest to hold the Ring of 
power in Britain. 

Dr Pangloss extends his influence across the big pond too. America's 
stock markets are nearly back to their all-time highs achieved in the heady 



hi-tech boom days of 2000. An investor in American shares back in March 
2000, however, would still have made no money at all. 

Okay, say 'the markets', things have been bad, but they are looking up. 
Corporate profits in the US, Europe and Japan have also hit peaks. In- 
deed, corporate profitability, that is profits relative to investment, is now 
nearly back to the level of 1997, the profit peak of the great stock market 
and economic boom of 1982-2000^ 

It's nearly back, but not quite. And here we can detect just a sign that all 
is not perfect in the most perfect of capitalist worlds. We could survey the 
world capitalist scene after 20 years of 'globalisation' in a more realistic 

First, globalisation has brought us terrorism and the "War against Terror". 
That does not seem to be going too well. The US and its imperialist allies 
are locked into a never-ending occupation of Iraq with daily heaps of 
bodies (of course, it's mainly ordinary Iraqi people). The 'freedom forces' 
are penned up in their bunkers in the Green Zone of Baghdad, hardly 
venturing out. Thus, the militias of the various religious sectarian groups 
continue their murder and mayhem. Above all, Iraq slowly slips out of the 
control of US imperialism. 

Across the border, Iran's mullahs preach defiance, while Hezbollah in 
Lebanon claims victory over the strongest army of the Middle East and 
the key henchman of imperialist rule in the region, Israel. And in Afghani- 
stan, the religious fundamentalists of the Taliban successfully sting and 
cuff British armed forces in the harsh hinterland — when will British 
imperialism realise that they cannot tame Afghanistan, a cemetery for 
British soldiers for nearly two hundred years? 

The FT tells us that all is well because this period is like the 'globalisation' 
free trade era of the 1 9th century that brought British capitalism its great- 
est success. Here the FT stretches history. British capitalism led the 
world economically from the time of the Industrial Revolution at the end 



of 18th century to say about 1870. From then on, in the period of 
'globalisation', other capitalist powers, like the US, Germany, France, be- 
gan to compete for spheres of influence and gain around the world. Free 
trade was no longer a boon to the UK. 

Indeed, the current period is much closer to the struggle for markets that 
we saw at the end of the 19th century that Britain lost and eventually led 
to a world war in 1914 and again in 1945, before the US became the 
hegemonic power Now in 2006, it is the US that is struggling to maintain 
its dominance: it is losing market share in exports; it is running up huge 
debts with the rest of world; it is finding it difficult to get other capitalist 
powers to support its interests in the Middle East and Latin America and 
it is losing any influence at all in Africa. Its influence in Asia through Japan 
is now threatened by a colossus, potentially bigger than itself, China. Far 
from globalisation heralding peace and prosperity in the world, it suggests 
increased rivalry and conflict. 

British capitalism continues to rest its hopes on the US remaining top dog 
and remaining prosperous. Over the next 20 years, it is a gamble that will 
deliver, not "progress and success", but collateral damage not seen since 
the 1930s-. 

After all, let's be clear about some key facts on globalisation before we 
accept the FT's praise for it. Has it brought prosperity? Well, at the level 
of production, it has been a relative failure. Branco Milanovic is the lead- 
ing economist at the World Bank. He has recently published a book called 
World's Apart: measuring international and global inequality^ 
Milanovic opens by saying that "the average world growth rate in output 
per head has declined in the last 20 years". 

So, under globalisation, and even taking into account that the advanced 
capitalist countries have suffered only 'mild' economic recessions in 1990 
and 200 1 ; and even taking into account, China's staggeringly fast growth 
in the last ten years, the world average growth rate was still lower in 
1979-2000 compared to 1960-78. Indeed, over the last 20 years or so. 



every year one country out of three has seen its GDP per capita decline 
— such is the inefficiency and instabihty of globalised capitalism. 

And of course, these figures are averages. What Milanovic shows in his 
book is that inequalities between rich and poor countries and between rich 
and poor within each country and between rich and poor globally have 
increased under 'globalisation'. He finds that there "has been a steady 
and sharp increase in inter-country inequality", after being broadly con- 
stant prior to the launch of globalisation. 

Even more startling is the inequality within the world's population wher- 
ever they live. According to Milanovic, "77% of the world's population 
live below the rich world's poverty line. There are 79 countries that are 
poorer than Brazil and they constitute 70% of the world's population." By 
his calculations, there is only 6.7% of the world's population that can be 
considered middle-class. He reckons that about 17% of the world's popu- 
lation can be considered rich. Even in the rich countries of the world, 
there are 92 million people who can be considered poor by world stand- 
ards. In the poor countries, the poor constitute 93% or 4 billion people! 

Economists measure the inequality of income by what is called the Gini 
coefficient. I won't explain how that works here, but suffice it to say that 
the higher the Gini coefficient between and 100, the greater the inequal- 
ity. According to Milanovic, the Gini coefficient has increased from the 
start of industrial capitalism back in the early 19th century when it was at 
12 to reach 35 by the end of the 19th century (that is three times more 
unequal), to 65 by the early 1950s (five times more unequal) and to remain 
at this high level since then, despite China and India's fast growth in re- 
cent times. So globalisation under capitalism has been no great boon for 
more than 80% of the world's people. 

While the world's stock markets bathe in the glorious September sunshine 
of huge company profits, bringing massive bonuses for the top executives 
and Wall Street and City of London financial traders", the rest of us feel a 
lot less sanguine about the world. 



The US is about to hold elections for its congress. Despite apparently 
everything being rosy, Bush continues to score lows in the opinion polls 
and the Republicans could be defeated in the elections despite gerryman- 
dering and a lack of enthusiasm for the opposition Democrats. It's the 
same in the UK. Tony Blair polls at record lows and New Labour is 
behind the Tories in the polls. 

But leaving aside both leaders' appalling foreign policy, is it so surprising 
when we realise that the so-called fruits of globalisation have not perme- 
ated down to most ordinary families in the US or Britain. In the US, the 
share of wages in national output is the lowest ever, while corporate prof- 
its hit its highest share since the Golden Age of the 1960s and this at a time 
when economic growth does not match the growth of the 1960s. 

The 'overall sense of progress and success" that the FT refers to from 
globalisation seems absent from the data in the 'land of opportunity', 
America. According the US Census Bureau, in 2004, the top 20% of US 
households took over 50% of all income earned while the bottom 20% got 
only 3%. In 1980, at the start of globalisation, the top 20% took 43% and 
the bottom 20% just 4.2%. The top 1% is even better off They took 
11.2% of all income in 2004 compared to 6% in 1980. They have nearly 
doubled their share under globalisation. It was always very unequal, but 
it's even worse now. 

If we look at wealth owned by households in the US and not just income 
earned in a year, the situation is even more shocking. According to the 
Federal Reserve Bank's latest consumer finances survey, the wealthiest 
1% of Americans own 33.4% of all net wealth after deducting mortgages 
and other debt. That's up from 30.1% back in the late 1980s before 
globalisation took hold. The bottom 50% of Americans owns just a stag- 
gering low 2.5% of all household wealth! 

And it is going to get worse not better'. Real wages are falling in the US. 
The median average hourly wage after inflation has fallen 2% in the last 
two years. For young people joining the labour market, they are finding 



that entry-level real wages are 4% lower than in 200 1 . Those with young 
families have seen their income fall 6% in the last five years. 

The FT notes the problem of inequality in its editorial and admits that 
inequality in Britain has not altered under New Labour since 1997. It also 
notes growing inequality between the regions and the problems of provid- 
ing enough infrastructure and resources to house growing numbers of 
immigrants, whose labour has enabled British capitalism to keep its head 
above water by taking low wages and working long hours and not using 
social services. But the FT sweeps all these problems aside in a blaze of 
sunny confidence. 

Britain's capitalist survival has increasingly been built on becoming a rentier 
economy, relying on providing financial and 'professional' services to other 
capitalist nations who are producing surplus-value. Britain, as far as capi- 
talism is concerned, has become a huge Switzerland, banking the world's 
profits, for a fee. The City of London is a giant aircraft carrier parked in 
the Thames, where world money flies in and out, with little touching the 
sides, except for those working on the carrier and living in London and the 
south-east. The rest of Britain is just a dark shadow to these people. 

But if 60 million people must depend on the success of the world's stock 
and bond markets and above all on the continued success of the US 
economy, then they ought to view the next five years with trepidation. The 
housing bust is well under way across the pond and it promises to be the 
worst ever. Usually housing markets, when they blow out, tend to take 3- 
4 years before they reach a bottom. That puts the trough at around 2009- 
10, just at the time we could expect the next economic recession in the 
US, if history is any guide. 

1. See the data expressed in the US profit graphic on page 36. 

2. The credit crisis and the ensuing Great Recession of 2008-9 
have deUvered more damage to the capitalist system than any crisis 
since the Great Depression of the 1930s. 



3. Branco Milanovic has recently updated his figures to show even 
greater global inequality — see the World Bank website. 

4. No change there: Goldman Sachs have Just announced a record 
payout on bonuses for 2009-10 at the trough of the Great Reces- 

5. The latest figures from the 2008 US Census Bureau report show 
increased inequality. 




From boom to slump 

The financial press and the investment houses of global finance capital 
are in euphoria. The world's stock markets are booming. But a closer look 
reveals that all this euphoria is misleading and the real situation is far less 
healthy than would appear on the surface. 

The US stock market index (called the Dow Jones industrial index), which 
measures the stock prices of the top 30 companies in the US, has just hit 
an all-time high. Other wider-based indexes, both in the US and Europe 
are also at five-year or more highs. Even the Japanese stock market, 
which plunged to incredibly low levels after the financial market bust of 
the late 1980s, has started to recover. 

Even so, these new highs are somewhat misleading. The Dow Jones in- 
dex may be at an all-time high of 12,000-plus. But it has taken six and half 
years to get back there after the collapse in stock market prices 
back in March 2000. 

So if you had been stupid enough to invest in stock markets (as many 
middle-class people did and most of us were indirectly forced to do be- 
cause our pension funds did) back in 2000, you would have made no money 
at all until now! You would have been better leaving your hard-earned 
savings (assuming you had any) in the bank. 

Moreover, if the stock market indexes were adjusted for inflation since 
2000, then the Dow Jones index has not reached an all-time high. To do 
that, it would have to rise another 15% before investors who bought stocks 
back in 2000 could claim to have made any money after deducting for 

Nevertheless, the flnancial press and the investment houses of global fi- 
nance capital are in euphoria. They are making huge profits — every day, 
the big investment houses announce yet more billions of profit made. This 



Christmas, their executives are expecting massive bonuses to their al- 
ready bulging pay packets. Their earnings will be matching those of pro- 
fessional footballers. No wonder property prices in the 'best' parts of 
central London are rocketing! 

These bonuses and the profits of finance capital also go a long way to 
explain why the stock markets are booming. Stock prices are rising fast 
because the level of profits for big business in Europe, Japan and the US 
seems to be at record highs. 

According to the official data, the share of profits in annual national in- 
come is at a record high in the US, with the share going in wages (both for 
ordinary workers and their managers) at all-time lows. It's the same thing 
for Europe and Japan. The economic growth of the last few years since 
the mild global recession of 200 1 has been mainly diverted into profits and 
workers have gained little or nothing. 

It's the same thing with the profit margins. That's the measure of the rate 
of profit in a capitalist economy that the capitalist economists like to use. 
It measures the amount of profit made per unit of output. That is at an all- 
time high. 

The rate of profit from a Marxist value point of view is very different 
from the bourgeois measure of profitability because it measures profit 
relative to the total cost to capitalists of investing in plant and the labour 

Marx showed that capital accumulation would have a tendency to lower 
the rate of profit. That tendency for the rate of profit to fall could be 
counteracted for a while by higher exploitation of workers (as expressed 
in the higher share of profits in output which is what the capitalist meas- 
ures currently show), or by lowering the costs of equipment and plant 
through new technology. But eventually, profitability would fall. 



The rate of profit in the US under the Marxist definition is still below 
where it was at its peak in 1997. It has recovered from a low in 2001, but 
it has still not surpassed 1997. If that is right, then the argument that capi- 
talism is still in the early stages of profit downwave holds. According to 
my argument, capitalism is set for a tough time over the next decade 
similar to the 1970s and even more like the 1930s. If that is right, then the 
profitability of capitalism has probably peaked now and is set to fall from 

Investors in the stock markets are currently enraptured by the news that 
big business profits have been rising in the US at over a 10% rate for 17 
consecutive quarters. And in the current quarter (Q3'06), they will be up 
another 15%. Again these profit figures are misleading because much of 
the gains are concentrated in the finance sector. The most productive 
sectors of the economy, manufacturing and industry, have not recorded 
such mega results. The banks and finance houses have ripped off most of 
the profit. 

That's not good news for the future of capitalism in the US, Europe or 
Japan, because it means that surplus-value extracted from the output of 
workers will not be re-invested in new technology and equipment to cre- 
ate more value, but instead will go into what Marx called 'fictitious capi- 
tal', namely borrowing to speculate in the stock market or property, or will 
be invested abroad in exploiting workers in China, India etc-. 

Moreover many capitalist economists are now predicting that profits growth 
will slow to a trickle next year, as economic growth slows in the US and 
employment and investment costs mount. This is as good as it is going to 
get for capitalism. 

Already, we know that the great driver of US capitalist prosperity — 
house prices — has collapsed. The US housing market peaked way back 
in mid-2005 and now, for the first time in 15 years, average house prices 
are falling. That is really bad news for the mass of Americans who have 
increasingly come to depend on maintaining their living standards by bor- 



rowing more on their houses as their value rose. They will not be able to 
do that any longer. 

And they cannot expect to increase their incomes by working longer or 
taking extra jobs. Already Americans work more hours in one year than 
any other advanced capitalist country (with the exception of Japan). They 
work 20% more hours than French workers do in one year. It is a key 
reason why American capitalists have been making so much profit. Ameri- 
can workers create more value (and because wages have hardly risen, 
more surplus value) than in any other capitalist economy. 

But if Americans are going to have less money to spend because they 
cannot increase their borrowing any more and cannot work any harder, 
then demand for all the goods that they buy in the shops and demand for 
all services they pay for in restaurants, home maintenance, travelling etc., 
are going to slow down sharply. That means profits will no longer go on 
rising at such huge rates and may even start to fall by the end of next year. 

It may well be that economic growth in the US will stagger on at a 2% 
rate for a few more years. This is less than the growth rate of 3% that 
would be necessary to sustain the relatively low unemployment that the 
US has at the moment. As we already see in the UK, where unemploy- 
ment is already at a six-year high (even if it is still low by the standards of 
the 1970s), unemployment in the US will rise over the next few years. 

The cycles of boom and slump in capitalism have not disappeared. They 
seem to operate on a 9-10 year cycle. There was a worldwide economic 
recession or slump in 1980-2. Then the world capitahst economy recov- 
ered and an economic boom ensued (with a slight 'pause' in 1986-7). 
Finally, capitalism fell back into recession in 1990-2, about 9-10 years 
after the previous slump. Again capitalism recovered and a new boom 
ensued (again with a bit of pause in 1994). It culminated in another reces- 
sion (this time relatively mild) in 200 1 . 



Once more, capitalism took another breath of life and began a new 'boom' 
(although this is one of the weakest in capitalist history). This has lasted 
five years so far. But if the cycle of boom and slump holds, then it should 
hit a new trough about 2009- 10. The US housing slump will probably not 
reach its bottom until 2010, if previous real estate cycles in the US are 
anything to rely on. Also, profitability will be heading to a new low by then. 
Everything is shaping up for a very serious slump in world capitalism by 
the end of this decade at the latest. 

The way to test whether this is right is to monitor the growth of profits in 
the US, the movement of house prices, and the level of employment. Ex- 
pect all to fall over the next few years. That will wipe the smile off the 
faces of the stock market speculators. But the biggest misery will be 
reserved for those who must pay for the next world economic slump in 
jobs and living standards — us. 

1. Subsequent data to 2008 show that the rate of profit in the US 
peaked in 2005 and declined thereafter 

2. The credit boom of 2002-07 was a grotesque example of ficti- 
tious capital or credit bubble that burst in mid-2007. 




The economic witch doctor of 

Milton Friedman died on 16 November, aged 94 years. He was one of the 
foremost bourgeois economists of the 20"' century. His reputation among 
the right-wing capitalist leaders, especially those who drove the policies of 
reaction and counter-revolution against the gains of the post-war labour 
movement in the 1980s was second to none. 

Indeed, Friedman was seen by Thatcher, Reagan, Pinochet and many 
others of this ilk as their main source of advice in rejecting what they saw 
as the compromising class collaboration pohcies of the misspent 1960s 
and 1970s dominated economically by the ideas of John Maynard Keynes. 
For them, Keynes, a Bloomsbury-set bohemian, who advocated govern- 
ment spending and full employment at the expense of profits and low 
taxes, was anathema. 

It is no coincidence that the current US Secretary of State, Condaleeza 
Rice, among others, should be profuse in her condolences and in her intel- 
lectual debt to Friedman. 

What was Friedman's biggest contribution to the cause of capitalism? His 
main theoretical and empirical arguments started from the assumption 
that the capitalist system of production and accumulation was without 
fault in its essence. As long as market forces were allowed to operate 
untrammelled, then the price mechanism of the market would ensure the 
proper allocation of resources and thus maximise growth without any cri- 

This view was, of course, not original. It is the general ideology of modem 
capitalist economics, taught in all the university economic schools. But it is 
in direct opposition to the classical economists of the late 18"' century and 
early 19"' century like Adam Smith, David Ricardo, James Mill and Tho- 
mas Malthus, whose scientific inquiry led them to have grave doubts about 



the ability of capitalism to sustain long-term profitability and sustained 
expansion. For them, capitalism had serious defects, albeit either from 
agricultural monopolies, excessive competition or over-population. 

Keynes too worried about the stability of capitalism. The experience of 
the depression years of 1921 and 1929-30 led him to conclude that capital- 
ism could not guarantee steady economic growth without slumps and chronic 
unemployment at periodic intervals. So Keynes advocated making bank- 
ers keep their interest rates very low and for governments to borrow and 
spend money to sustain spending. That meant government had an impor- 
tant role to play in keeping capitalism stable. 

Like the Austrian school economist, Friedrich Hayek, Friedman found these 
ideas as one step on the road to socialism, for him, a system of slavery. 
Friedman proclaimed the right of the individual to make as much money 
as he or she could without regulation. Such was his enthusiasm for this 
principle that in his last years he was a strong advocate of abolishing all 
laws against smoking, alcohol, and drugs, which he saw as an attack on 
individual freedom. 

Friedman's most famous theoretical contribution was to argue that money 
was key to successful capitalism. It was the interference of the national 
bank in the US, the Federal Reserve, in the 1930s that caused the Great 
Depression, he argued. By restricting the amount of money in the economy, 
the Fed starved industry of the funds to grow. If it had stayed out of the 
equation, all would have been well. He and Anna Schwartz published in 
1963, The monetary history of the United States 1867-1950, to justify 
this argument. The evidence and conclusions of that book have subse- 
quently been contested by others. 

In his propaganda against government interference, he argued strongly 
for the complete privatisation of nearly all state functions including ending 
state education, and arguing for a flat rate tax — so a millionaire would 
pay the same percentage as the poorest paid worker He also opposed 
government control of the currency (he predicted that the euro would 



never be introduced in Europe and later, when it was, that it would col- 

It is a rather sickening irony that a man who claimed he was opposed to 
big government was only too happy to advise the military dictator and 
Chilean coup leader General Pinochet in economic policies during the 1970s 
and at the same time the Stalinist Chinese regime — all in order to bring 
about raw -blooded capitalism. 

Friedman is thus honoured in the church of capitalism. However, it is no 
accident that many of his policies have never been adopted nor will they 
be. The reality is that a completely free market without regulation would 
lead to anarchy and chaos for the capitalist system. Also, Friedman's 
policies would mean even more inequality of income and wealth than there 
is already, provoking reaction from working people. All-out Friedmanism 
would probably have brought capitalism to its knees. 

His emphasis on controlling the money supply has been completely ig- 
nored in recent years as finance capital has exploded. Credit has never 
been more out of control in the capitalist economies of 2006. The capital- 
ist apologists and leaders will mourn his passing, but not carry out his 
policies. The working class will remember the damage he has done to 
millions of people's lives. 




Gordon's year 

"Over the ten years that I have had the privilege of addressing you 
as Chancellor, I have been able, year by year, to record how the City 
of London has risen by your efforts, ingenuity and creativity to be- 
come a new world leader., an era that history will record as the be- 
ginning of a new golden age for the City. . .Britain needs more of the 
vigour, ingenuity and aspiration that you already demonstrate is the 
hallmark of your success ". Gordon Brown speaking to bankers in his 
last months as Chancellor. 

As I write, the UK"s inflation rate has hit an 11 -year high at 3% (exclud- 
ing the cost of mortgages) or 4.4% overall. At the same time, unemploy- 
ment is on the rise, if from very low levels. The misery index, a measure 
that combines the inflation and unemployment rates to provide a gauge on 
the general health of the economy is still low, but the direction up is clear. 

Most forecasters are expecting a relatively benign year for the economy, 
with growth around 2.5%. But even the most optimistic economists reckon 
there are sizeable risks to their predictions. 

The big one is stagflation, where economic growth slows but inflation 
goes on rising or does not slow. There is certainly a whiff of that in the 
British air this winter. And we get slowing wage incomes along with 
higher inflation, the mass of British households can expect no rise in real 
incomes this year. 

A key factor in relatively strong growth last year was the influx of immi- 
grants from the new countries of the EU in eastern Europe. These hun- 
dreds of thousands have worked hard for long hours, usually in relatively 
low-paid jobs, without taking much in the way of benefits or social serv- 
ices, while contributing to tax revenues. It has been a significant boost to 
the UK economy, but particularly to the profits of big and small businesses 
desperate for cheap labour. 



Despite the help of these new workers, there remains httle sign that the 
underlying productivity of British capitalism is improving enough to boost 
economic growth much above 2% a year The reason is clear British 
capitalism has reaped huge profits in recent years (the profit rate for UK 
non-financial corporations as measured in capitalist terms is now over 
14%, while the cost of borrowing money to invest is just 6%). 

But British capitalists have no intention of investing any of its accumu- 
lated capital back into British industries or services, except of course, in 
the hugely unproductive financial, property and business services sectors 
that increasingly dominate the UK economy. Investment goes overseas 
where returns are even higher. 

The economic boom since 200 1 has not been a product of investment into 
manufacturing or the infrastructure of the economy (roads, rail, housing 
etc). Nothing demonstrates that better than Britain's deficit on trade with 
the rest of the world. The trucks come across the Channel tunnel laden 
with imports and go back across to France relatively empty. 

The deficit on exports and imports of goods has reached a record 6% of 
GDP. Including services, like insurance, design, professional consultancy 
etc, where Britain runs a surplus with the rest of the world, reduces that 
deficit to 4% of GDP. Then British capitalism gets profits and dividends 
from its huge investments abroad. That reduces the overall deficit to 3%. 

The residual deficit has to be paid for. It is covered by large inflows of 
cash from the Middle East, Russia and other oil-producing dictatorships 
who park their money in London to take advantage of high interest rates 
(much higher than Switzerland, the alternative port of call). In this way, 
the British pound has not slid away despite the deficit the economy runs. 

British capitalism is now almost completely parasitic. Long gone are the 
days when Britain was the manufacturing centre of the world (that was 
over 150 years ago), or even a major industrial power (finished by the 
1930s). Since 1945, there has been a steady erosion of British manufac- 



turing and engineering prowess and its replacement by the City of Lon- 
don, the banks, finance houses and ancillary services as the major earner 
of profits and provider of employment. 

The City of London is now like a large aircraft carrier off the shore of the 
Thames, completely separated from the rest of the country. Its prosperity 
now depends on the ebb and flow of international capital and above all on 
the prosperity of the US economy and its equally overblown financial 
sector around Wall Street, New York. 

Little do the financiers of Goldman Sachs worry about employment and 
incomes in Newcastle or Liverpool. Their grotesque incomes and bo- 
nuses (rather quaintly called 'compensation') are used to inflate luxury 
house prices (in Chelsea and Kensington, London they are up 28% in 
2006, the highest rise since 1979!), not to spend on British-made goods. 

This year, the bonuses for all 170,000 Goldman Sachs employees equalled 
the annual national product of Vietnam, a country of nearly 80m people. 
In the UK, £9bn were paid in bonuses to City of London traders with one 
GS trader alone getting £50m. No wonder that, under the mantle of New 
Labour, the inequalities of income and wealth in the UK (just as in the US 
under Bush) have increased substantially. On the day that Goldman Sachs 
announced its bumper bonuses for 2006, its cleaners went on strike and 
demonstrated about the appallingly low rates of pay (£5.35 an hour) their 
employer (part-owned by GS) gave them. 

The left-leaning capitalist economist, Kenneth Galbraith, coined a phrase 
to describe capitalism when it was doing well: it delivered "private afflu- 
ence, but public squalor". The incomes and wealth of the rich clearly 
demonstrate the first half of that equation. 

The second half is revealed in all the things that would matter for the 
majority of Britons. Despite more government spending, our public serv- 
ices remain either in dire straits or ripped off for private profit. 



Take housing. In the 1950s and 1960s, under Labour and Conservative 
governments, public housing programmes were expanded so that at one 
point over one million homes were built in a year But now 50 years later, 
the government cannot even guarantee that private sector builders can 
manage more than 50,000 homes — and most of these will be priced out 
of the range of those that badly need them. Of course, none of this af- 
fects the rich in their mansions in London, second homes in Cornwall and 
their buy -to-let investments. 

Take transport. The national rail service was raped and butchered by the 
Conservative government of the 1990s to impose a ludicrous 'franchise' 
system that means capitalist companies can get taxpayer subsidies, hike 
fares to Europe-highest levels and still fail to provide a safe and punctual 
service to commuters and travellers. That forces more people into cars to 
clog up the roads and put their lives and limbs in danger. Of course, the 
rich in their gas-guzzling Chelsea tractors and first-class air travel don't 

Take health. Despite more spending, the government continues to de- 
stroy this major achievement of the post-war Labour government — a 
universal health service free at the point of use — by making every unit 
operate on a so-called market basis, charging internally for services and 
hiving off sections to private health cowboys and gradually privatising 
through health foundation hospitals and private GPs and dentist services. 

No wonder MRSA and other diseases spread through the hospitals, inad- 
equately cleaned as they are by understaffed, poorly paid contracted em- 
ployees. This does not worry the rich. They have private insurance and 
private hospitals, staffed by doctors, consultants and nurses trained by the 
NHS and often moonlighting from NHS hospitals. 

Take education. Sure, new schools are being built (usually by handing 
over ownership to private builders, or handing over complete schools to 
individual capitalists). But teachers struggle to earn a living, classrooms 



remain crowded, college students have to pay big tuition fees and take out 
loans and standards slip further behind those abroad. 

The middle-income families of Britain fear the worst and are desperate to 
send their kids to 'posh' schools to give them a chance to get up the social 
ladder. What could be more damning that a leading Labour cabinet min- 
ister, who used to be education secretary presiding over the closure of 
'special schools' for those with learning difficulties, should decide to send 
her child to a private school despite several available state schools. La- 
bour leaders have no belief or commitment to publicly-financed free edu- 
cation. Again, none of this worries the rich. They have their expensive 
private schools and universities. 

The vast majority of Britons do not get huge bonuses, but work the longest 
hours in Europe with the shortest holidays to just about make ends meet. 
Massive borrowing at low interest rates has fuelled spending power That 
sparked a housing boom of monstrous proportions, which eventually col- 
lapsed in 2004. 

Now continued low interest rates and banks flush with cash ready to lend 
have revived the property market again. But the property and credit boom 
has left most British households witli huge debt. Sure, these are mainly 
mortgages backed by inflated house prices, but debts they still are, now 
standing at 159% of average household disposable income — way higher 
than anywhere else in Europe or the US. 

And during 2006, the Bank of England steadily hiked interest rates. As a 
result, the debt burden (what households have to pay on their debt in 
repayments and interest) has reached over 12% of disposable income, or 
back to the levels of the early 1990s and not far behind the level reached 
before the last economic recession in 1990. 

Most significant, given the sharp increases in electricity and gas prices 
and taxes, British households now spend more of their income on non- 



discretionary spending (necessaries like the mortgage etc) than since 
records began in 1988! 

And it is big assumption that house prices will continue with their recent 
recovery when mortgage rates are heading upwards through 2007. Higher 
borrowing costs will curb the ability of the average working family to 
spend more. As a result, economic growth is going to slow. 

This is the environment that Gordon Brown will succeed to the leadership 
of the Labour party and as prime minister. He will be the first Scottish 
prime minister since Ramsay MacDonald in 1929. MacDonald was the 
Labour leader who betrayed the labour movement in 1931 by breaking 
away and forming a national coalition with the Tories and the Liberals 
designed to impose severe cuts in social benefits and jobs on the working- 
class at the height of Great Depression. 

This is not a comforting analogy with Gordon Brown. Will economic 
slowdown mean that he too will begin to make the working class pay to 
make capitalism work? 


January 2007 CHAPTER TWENTY 

Capitalism unleashed 

In his new book, Capitalism Unleashed^, Andrew Glyn attempts to ex- 
plain how capitalism moved from the crisis of the 1970s to recovery in the 
1980s and 1990s. However, although full of interesting information, the 
book fails to provide an overall analysis and misses some essential as- 
pects of Marxist theory. 

Andrew Glyn is an economist at Oxford University. He has always been 
on the side of the angels. A doughty fighter for the cause of the labour 
movement, he has written and acted extensively for the interests of the 
working class and for the ideas of sociahsm-. 

He was at one time an economic advisor to the National Union of Mine- 
workers, the organisation that led the struggle against the imposition of the 
most ruthless policies of capitalism that were unleashed in the UK under 
the leadership of Margaret Thatcher in the 1980s. 

In his most well known book, written back in 1973 with Bob Sutcliffe 
(British capitalism, workers and the profits squeezey, Andrew ex- 
plained how the Golden Age of modern capitalism came about from 1 948 
to 1973 and gave an analysis of why it came to an end and capitalism 
started to exhibit the symptoms of chronic crisis in the 1970s. 

The analysis then of why capitalism fell into a period of crisis, of revolu- 
tion and counter-revolution, was that the profitability of capitalist accumu- 
lation had begun to deteriorate to levels that created the conditions for 

Glyn and Sutcliffe 's profitability thesis was not Marx's, however, but one 
that relied primarily on the argument that full employment in the late 1 960s 
meant that workers could organise to raise wage levels, while interna- 
tional competition did not allow capitalists to raise prices to compensate. 
Thus the share and mass of profits in the economy were squeezed and 
this forced down profitability. 



This explanation of the fall in capitalist profitability in the UK (and else- 
where) at that time was broadly wrong, in my view. In Glyn and Sutcliffe's 
explanation of the end of the Golden Age of capitahsm from 1948-73, 
profits were squeezed by labour's share of value added growing and not 
by a rise in the organic composition of capital, which would be Marx"s 
main argument for the decline in the rate of profit and eventually the mass 
of profit, and thus crisis. 

The empirical evidence compiled by several people (including myself) is 
that the rate of profit in the OECD economies started to decline after 
1964 well before labour's share rose. The rising organic composition of 
capital was the main cause. However, it is true that in the latter part of 
the sixties, profits were also squeezed by a rising share going to labour — 
something Marx envisaged in the later stages of the capitalist economic 

Glyn and Sutcliffe at the time not only denied the role of a rising organic 
composition of capital empirically but also denied its role theoretically in 
explaining any decline in capitalist profitability. They fell back on a non- 
Marxist explanation based on Ricardo. 

This was important, because if profits were only squeezed by labour power 
then capitalism could right itself by destroying wage gains. My argument 
is that even if wages are held down, capitalism cannot succeed indefi- 
nitely because of Marx's explanation of declining profitability. The evi- 
dence now confirms Marx's view not Glyn's. 

But be that as it may — at least it was an analysis. What is lacking in this 
latest book by Andrew is just that. In Capitalism Unleashed, the reader 
is given, in Andrew 's own words, "a short history of how this transforma- 
tion" from the crisis of capitalism of the 1970s turned into a successful 
capitalism of the 1980s and 1990s, with fewer economic slumps, rising 
profitability, a significant weakening of the labour movement and the end 
of the Soviet Union and its replacement by capitalism. 



A series of chapters describes how capitalist leaders adopted new poli- 
cies that rejected accommodation with the labour movement and the work- 
ing class, crushed the trade unions, reduced state spending on unproduc- 
tive and unprofitable social welfare, and privatised and emasculated the 
state sector. 

Also, in one of the most interesting sections of the book, Andrew shows 
how capitalism was launched on a new phase in its history as it became 
truly global with the emergence of the economic powerhouses of China 
and India and the widening of "free trade". This globalisation coincided 
with the introduction of new technology and the extension of the influence 
and role of finance capital globally. 

All this is a very useful (if in parts opaque) account of the history of 
capitalism in the last 25 years. But the weakness of the book, in my view, 
is revealed in Chapter Six entitled Growth and Stability. 

Here Andrew asks the question: if capitalism managed to remove most of 
the shackles of the labour movement and state regulation over its work- 
ings in the 1980s and 1990s, why did it fail to grow as fast as, or faster 
than, in the Golden Age of the 1960s? Capitalism had been unleashed, but 
it had not proved more dynamic. "Output per head has been growing 
more slowly since 1990 than it did in the turbulent period of 1973-9, never 
mind the Golden Age" (pl51). 

But Andrew's answer to his own question is not really forthcoming, ex- 
cept to suggest that maybe the economic dynamism has simply shifted 
from the more mature capitalist economies of the OECD to China and the 
emerging world. Also, because there is no analysis of why capitalism 
managed to turn things round and began a period of rising profitability and 
success (in capitalist terms) after the crisis period of the 1970s, there is no 
insight on where capitalism is going now. 

The capitalist backlash against labour in the 1980s laid the basis for a 
renewed rise in profitability, but it was not just the reduction in labour's 



share that did the trick. It was the two deep economic recessions of 1974- 
5 and 1980-2 that cut back the cost of constant capital (plant, machinery 
etc) and thus reduced the organic composition of capital. That was the 
key factor in renewing the profit cycle for capitalism. 

As for timing, capitalism entered an upswing in profitability from 1982 that 
culminated in a peak (in Marxian value terms) in 1997. This enabled eco- 
nomic growth to be faster than seen between 1964-82 but still not as fast 
as between 1948-64. It seems that capitahsm (at least in OECD) is past 
its use-by date and cannot grow as fast as it did in previous upswings — 
again something that Glyn finds inexplicable. 

Indeed, Andrew concludes, productivity growth in the last 25 years has 
been pretty "typical of most developed capitalist countries since 1870" 
and "performance over recent decades is within the 'normal' range" with 
no compelling evidence that there will be any decisive change from these 
long-run norms over the next decade or so" (pi 51). 

Slightly slower (but more stable) economic growth under capitalism in the 
last 25 years hardly constitutes a crisis for capitalism in the rich countries, 
Andrew admits. As a result, he seems to conclude that there is no reason 
why the current scenario for capitalism will ever change, except for a few 
thoughts on China breaking down, a lack of resources and environmental 
problems or the collapse of America's consumer boom somehow. 

Andrew seems somewhat at a loss on the direction of capitalism from 
here... "trying to work out more or less likely long-term scenarios is just 
peering into a highly uncertain future" (pl55). Indeed it is, but that is part 
of the theoretical task, is it not? Perhaps, if he had returned to the ap- 
proach of his book in the 1970s, which presents a theory of capitalist 
accumulation based on a law of profitability, he might have found some 

In my view, the last 25 years of capitalist success has been based on a 
recovery in profitability for the very reasons that Marx explained could 



happen. However, the next couple of decades will see a reversal of that 
process because Marx's most important law of the motion of capitalism 
will exert itself Thus, falling profitability will turn capitalism back into 

Instead, Andrew prefers to try and answer what he calls "the more im- 
mediate question": namely what can the labour movement and presum- 
ably leftist govermnents do to improve welfare now for the working-class 
in the environment of global capitalism? In his final chapter he outlines 
the inequalities, poverty and lack of welfare that continue to exist in large 
doses. He argues for less inequality, less poverty and more welfare, in 
particular pressing for a policy of a basic income for all, to free people 
from the misery of toil. 

These are worthy objectives, but how can they be possible if an unleashed 
capitalism shows little real sign of crisis? As such, this last chapter of 
policy aims is no substitute or compensation for the lack of a convincing 
theory or analysis of why, how or when capitalism might yet falter. 

I reckon that capitalism is again in a downswing similar to the period 
1964-82. That heralds a period with more economic slumps than we saw 
between 1982-00 (just one in 1990-1), lasting up to 2014-16. Unless the 
working class seizes its opportunities over the next decade, then capital- 
ism will find a way to revive itself at the expense of us all. 

1. Andrew Glyn, Capitalism Unleashed, 2007. 

2. Andrew sadly died on 3 January 2008. He will be badly missed. 
See my obituary at 

3. See A Glyn and R Sutcliffe, British capitalism, workers and the 
profit squeeze, 1972. 




Equality, inequality and oppor- 

Ben Bernanke is chairman of the US Federal Reserve Bank. As such, 
he heads up the most important central bank in the world. It is his job to 
review continually the state of US capitalism and then decide what action 
to take with monetary policy. 

In doing that, under the aims laid down by the US Congress (the political 
arbiter for the US capitalist class), he must try and reconcile the objec- 
tives of good economic growth with keeping inflation down. In essence, 
he must make the two wings of capitalism happy: the manufacturing and 
business sectors want good profits and growth; the finance sector wants 
low inflation so that their income from interest rates is preserved. 

At the Federal Reserve Bank, he has the economic weapons of deciding 
the basic interest rate for borrowing and lending; the sole right to print 
money (dollars); and the power to insist how much the commercial banks 
must deposit with the central bank, thus controlling the quantity of money 
in the economy. 

These are powerful tools in affecting the anarchic and unplanned expan- 
sion and contraction of capitalist growth. Since the early 1990s, the US 
economy has grown at about 3% a year with inflation lower than that. 
There has only been a mild recession in 200 1 . It's true economic growth 
has been relatively slow compared to the Golden Age of 1960s, but since 
2001, profit growth has rocketed and the share of national income going 
to profits compared to wages has never been higher. 

So it's no surprise to tell you that Ben Bernanke and his predecessor, 
Alan Greenspan, are treated like gods by the capitalist class in the US 
and in most of the rest of developed capitalist world. Because of that, Mr 
Bernanke 's every word is drooled over by the capitalist press, the finance 
houses and the big capitalist corporations. And what Ben Bernanke has 



to say about the prospects for capitalism and even why and how the 
capitalist system works so successfully is closely followed. 

Last month, in his wisdom, good old Ben decided to pontificate about the 
question of inequality of wealth and income in capitalist society. Global 
capitalism seems to be rolling along nicely at the moment — if you meas- 
ure it by the size of profits being made by the big corporations and banks. 
Of course, it does not seem so great if you view it from the perspective of 
the unemployed, the poor, the hard-working mass of families in the 'rich' 
OECD countries; and even less so for the billions on less than $2 a day; 
living in horrific housing and sanitation and facing the risks of major envi- 
ronmental and climate hazards. 

But good old Ben is aware that, although capitalism is pounding out good 
profits at the moment, there is growing criticism that the majority do not 
get the fruits of capitalist success. Indeed, the majority who depend 
solely on selling their labour time to survive are actually experiencing 
declining living standards. It has been well documented the average 
American household has seen no increase in living standards in the last 
20 years'. And moreover, inequality of income (what you get in the pay 
packet every week or month) and wealth (what you own) is increasing in 
the US and in most advanced capitalist economies-. 

The grotesque news that the directors of the most powerful investment 
bank in the world, Goldman Sachs, were paid in bonuses alone tens of 
millions and the whole staff of 170,000 got over $9bn lastyear, while the 
cleaners in the bank's offices in London had to go on strike to get the 
minimum wage, is just one example of the extent of this inequality. We 
could go on. . . but let's hear Ben first. 

In a speech to the Greater Omaha Chamber of Commerce on 6 Febru- 
ary^, Ben Bemanke explained that American capitalism stood for equal- 
ity! But wait. . . this was not equality of income and wealth. No, this was 
equality of opportunity: "a bedrock American principle is the idea 



that all individuals should have the opportunity to succeed on the 
basis of their own effort, skill and ingenuity", thus spake Ben. 

However, he went to make it completely clear that enlightened capitalism 
did not actually stand for equality: "although we Americans strive to 
provide equality of economic opportunity, we do not guarantee equal- 
ity of economic outcomes, nor should we. " 

Ben went onto admit that inequalities of 'outcomes' (as he calls it) had 
increased under capitalism. "Rising inequality is not a recent devel- 
opment, but has been evident for at least three decades, if not longer. " 
He pointed out that the average American worker's income has risen 
11.5% in real terms since 1979, but the poorest wage earner had only 
seen a 4% total real rise in 27 years. Yet, the top 10% of income earners 
got a 34% jump. Whereas the top 10% had incomes 3.7 times greater 
than the bottom 10% in 1979, now that ratio had reached 4.7 times. 

When Ben looked at households, the situation was even worse: the top 
20% of households took home 42% of all household income in 1979; now 
they take 50%. The bottom 20% of households took just 7% back in 
1979; but now they get even less — just 5%! The top 1% of households 
in America has 14% of all income, up from 8% in 1979. 

This is not good, Mr Bernanke told his audience in Omaha, Nebraska, the 
home of the Warren Buffett, the world's second-richest man and the 
world's most successful investor What is the reason for growing in- 
equality, he tentatively asked? 

Apparently, it was not particularly due to increased demand for higher 
skilled workers who must be paid more. As Ben told the Omaha gang, 
super-rich income earners like football stars, chief executives of big cor- 
porations and Goldman Sachs employees do not have higher skills than 
their predecessors in 1979. Their skills are much the same; it just seems 
'society' is prepared to pay finance executives and baseball players even 



Ben admitted the globalisation may have reduced jobs for unskilled work- 
ers or at least lowered their wage bargaining power, but he did not thinlc it 
was the main reason for growing inequality of income. He plumps for 
education as the key. 

The continually changing nature of anarchic capitalism that is now global 
means that if you want a well-paid job you have to be well-educated and 
able to switch from industry to industry and be mobile. Those who get 
educated well and early will get more income. So Ben's answer is this: 
we do not need to reduce the wealth and incomes of the rich by progres- 
sive taxation or public ownership (god forbid!); and we cannot reduce 
inequality through public spending to improve the lot of the poor and un- 
employed. No, "the challenge for policy is not to eliminate inequality 
per se hut rather to spread economic opportunity as widely as possi- 
ble... through policies that focus on education, job training and 
skills " . 

So that's it: more resources on education and skills training. Two imme- 
diate questions spring to mind: first, if more education is the answer to 
reducing inequality (or at least establishing equality oi opportunity), why 
is inequality of opportunity growing? 

Take the UK, under New Labour spending on education has increased as 
a share of annual income and government spending. This has happened 
for ten years amid much groaning and moaning by the capitalist class 
who complain that taxation to do it is too high and ruining them. 

Yet after ten years, the UK rates of inequality of income and wealth have 
increased. And so is inequality of opportunity. It is now much more 
difficult if you are the son or daughter in a working-class family to move 
up the social ladder than it was 25 years ago. 

The second question is that where is the money for education spending to 
come from? More spending on education must either come through the 
capitalist market sector (private schools and universities) that are out of 



the reach of most working families; or it must come through the state 
system (and that means more taxation). Are the working-class to be 
taxed more for their own minimum education or will the richest be taxed 
more? You know what the answer would be from the likes of Goldman 
Sachs, the Bush and Blair/Brown governments? 

But most the fundamental point against Ben Bemanlce's thesis that 'equality 
of opportunity' is the right objective not 'equality of outcomes' is that 
without greater equality of wealth and income there can be no equality of 

The reason that the rich are getting richer is that they are rich. The poor 
get poorer because they are poor. Inequality of income and wealth is 
endemic to the capitalist system of production and capitalism works best 
(at least for a while) by increasing inequality. The measures of inequality 
will never decline unless capitalism is curbed. Of course, if you curb a 
system, it does not work well; so you have to change it. 

Ben Bernanke's speech to Omaha's rich was entitled The level and 
distribution of economic well-being. Marx considered the same topic 
over 150 years ago. His main message was that a fair and cooperative 
society (a socialist society) would ask every citizen to contribute accord- 
ing to their means and receive back according to their needs. It was not 
question of having equality of opportunity, but having the resources to live 
according your needs. If you had a large family, had disabled or sick 
people in your household, the need to educate, the need to retire, the need 
for hospitalisation etc, more resources would be provided by society. 

Those resources would come from everybody's contribution to produc- 
tion (each with various levels and types of skill). But these resources 
could not be garnered and distributed and achieve "economic well-being" 
under a system of production specifically designed to ensure that the 
ownership of the means of production and distribution was in private hands 
(and by just a few people as well). In other words, the capitahst system 
cannot achieve equality of opportunity precisely because it needs inequality 



of wealth and income to function. Only a socialist society works to re- 
duce inequality through public ownership of wealth and democratically 
planned distribution. 

Recently, the UN commissioned a report on inequality in the whole world''. 
The report found that that "for the world as a whole, the share of 
wealth (property, investments and money) held by the top 10% was 
85%! " And one-quarter of those super-rich were in the US alone. The 
poorest 50% of the world's 6.6bn population own just 1% of the world's 
riches — so much for equality of opportunity. 

1. US Bureau of Economic Analysis income data. 

2. Federal Reserve Bank consumer finances survey 2007. 

3. Federal Reserve Bank, 6 February 2007 speech. 

4. Anthony Shorrocks, Director of Research at the World Institute 
for Development Economics Research of the United Nations Uni- 
versity (UNU-WIDER). 



Will there be a slump? 

As I write, the world's stock markets are hitting all-time highs in their 
prices. This is not only in Europe and the US, but even more in markets 
like those of India and China, where there seems no end to the spiralling 
upward of the burgeoning capitalists economies and their accompanying 
stock markets. 

Most economists are forecasting global economic growth of over 4% in 
2007, led by China and India and supported by Europe and Japan. Only 
the US economy is slowing as its housing market collapses. Even so, 
hardly anyone is expecting the US economy to drop into a slump. 

Are all these optimists right? Is capitalism going to go on growing without 
any volatile downturn or slump in the next few years? 

The answer to these questions, in my mind, depends on the capitalist profit 
cycle. Profits drive investment under capitalism. And investment drives 
growth, employment and this consumer spending. The motion of capital- 
ist production starts and ends with profit. 

And when you analyse the movements of the various cycles under capi- 
talism: the stock market, prices in the shops, construction and housing, or 
output and employment, it is the profit cycle that links them. 

I have argued that the capitalist profit cycle spans about 36 years from 
trough to trough. The last trough in profitability was in 1982 and so the 
next one will be around 2015-18'. 

The stock market cycle almost matches the profit cycle in its timing, not 
surprisingly, as stock market investments depend so closely on the rise 
and fall of profits. 

There are other cycles of boom and slump in the capitalist economy. There 
is a real estate/construction cycle. That cycle runs about 18 years from 



trough to trough, about half that of the profit cycle-. There have been 
three post-war troughs in the construction cycle: 1954, 1973 and 1991. 
The next one is due in 2010. In other words, the current downturn in the 
UK and US housing markets, after its peak in the UK in 2004 and in the 
US in 2005, should reach a bottom in 2010. 

The output and employment cycle appears to be 9- 1 years in length from 
trough to troughl The last trough in the post-war period was the very 
mild recession of 2001. So the next trough should around 2010. 

Within all these cycles, there a much shorter trade cycle of about 4-5 
years from trough to trough. The last trough was in 2002 and so we can 
expect a 'pause' in economic growth this year, with another trough in 
2010. That pause seems to be hitting the US this year, but may not neces- 
sarily cause a full-blown recession. 

The profit cycle is key though. Because the troughs in the employment 
and building cycles in the mid- 1 950s coincided with a rising profit cycle, it 
did not produce any very deep recessions or downturns in economic growth 
and employment. 

From 1964-82, the rate of profit fell. So what we got was successively 
worse economic slumps (1970, 1974 and 1980-2) alongside rising prices 
— in other words stagflation. In 1 974, the profit, employment and housing 
cycles all troughed together and world capitalism suffered its first post- 
war simultaneous economic slump. The 1980-2 recession was deep and 
long lasting because it was when profitability reached lows. 

The nextupwave of profitability (1982-97) coincided with the downwave 
in the Kondratiev prices cycle", which we are still in. Thus rising profit- 
ability was accompanied by falling inflation, from 15% in 1982 to just 2- 
3% by the late 1990s. Rising and high profitability (by 1997-00) also 
meant that the output and employment troughs of 1 99 1 and 2001 were not 
nearly as deep or severe as 1974 and 1980-82. The construction cycle 
troughed again in 1991, making the 1991 recession much more severe 



than the 2001 recession when the housing market in the US and else- 
where was booming. 

We are now in another profit downwave that should not bottom until around 
2015. So output and employment slumps should be as severe and long 
lasting as they were in 1974-5 and 1980-2. 

This profit downwave now coincides with the downwave in the prices 
cycle that started in 1982 and won't reach its bottom until 2018. So it is 
likely that in future economic slumps, prices could fall absolutely as they 
did in the 1930s, the last time the profit downwave coincided with the 
downwave in prices, and as they did in Japan from 1989 for a decade. 

The next troughs in the construction cycle, the growth cycle and the short- 
term trade cycle are due in 20101 There has not been such a coincidence 
since 1 99 1 . And this time (unlike 1 99 1), it will be accompanied also by the 
downwave in profitability within the downwave in prices. That suggests 
around then, we can expect a very severe economic slump of a degree 
not seen since 1980-2 or more likely since 1929-32, the last time all these 
cycles troughed or were in downwaves. 

Of course, as Marxists know, the war of 1939-45 was no coincidence, but 
was a product of the continued failure of capitalism to restore its health by 
an arms race, the physical destruction of capital and the whipping-up of 
nationalist fervour among the masses by the ruling classes of each capi- 
talist state. 

In my view, the fact that the largest capitalist economic powers of the 
1930s (the US and the UK) were in a period of prices and profitability 
downwaves explains why capitalism did not seem to be able to recover. 

There is one other aspect of the capitalist economic cycle. There are four 
phases in the cycle of innovation that set the structure of the techniques of 
production in any era. 



Let me explain. From 1948-65, was the phase of take-off for the mass 
production of autos, electrical goods and other household consume items 
that had started to grow in the 1930s. These innovations, based on tran- 
sistors etc, now became the dominant sectors for profit and growth, while 
the older heavy industries of steel, shipbuilding, mining began to decline. 

From 1965-82 the mass production of electrical goods and autos entered a 
mature phase. They dominated as economic sectors, but no longer grew 
very fast and, in this period of profits downwave, increasingly did not 
produce the huge profits of the earlier phase. Alongside these dominant 
technological sectors were new, small, but now growing industries around 
computers (big macroframes) and hi-tech innovations that had been in 
just a discovery, inventor stage before. 

From 1982-97, profitability recovered, but the mass production sectors 
were saturated: on the whole consumers in the advanced capitalist econo- 
mies did not need or could afford more than two cars, five TVs or micro- 
waves etc. Manufacturers of these items faced fierce competition on 
price as consumers increasingly decided only on price for these commodi- 
ties. Alongside, the new hi-tech sector began to take off and in the profits 
upwave, the returns on these new products (PCs, the internet, Microsoft, 
e commerce) were spectacular. 

From 1997 onwards, the old mass production sectors have been in serious 
decline — at least in the top capitalist economies. And the new hi-tech 
sectors are now also entering a period of maturity (and dominance), where 
profits will be large, but profit growth will be low (especially as this coin- 
cides with the profit downwave). 

Sure, beneath surface, the innovations of the period 1982-97 (as yet un- 
clear, but probably nano technology, genetic technology etc) will begin to 
grow into commercial sectors. But this will be in a downwave period, 
unlike any other previous period since the second world war. And in the 
1930s, the downwave delayed the real growth of the mass production 
sectors until afterwards. The new technologies could be similarly stunted. 



The conclusion from analysing the profit cycle is that the world capitalist 
economy may not enter a major slump just yet. But capitalism (at least 
the G7 economies) is now heading for a combination of troughs in all its 
economic cycles (the motion of capitalism) that will coincide about 2010. 
The profits cycle is in a downwave alongside the prices and construction 
cycles. Capitalism is in its Kondratiev 'winter' period'' — making it very 
vulnerable to crisis. 

So the stock markets may have some to run. And the world's capitalist 
economies may continue to motor a while longer (in the case of China, 
perhaps until the 2008 Beijing Olympics is over). But the boom, extended 
as it is, by huge dollops of credit and speculation (what Marx called 'ficti- 
tious capital') is just propagating the conditions for a global slump not seen 
since the early 1930s. 

1. See chapter 6. 

2. See chapter 10. 

3. See chapter 11. 

4. See chapter 9. 

5. The Great Recession came in 2008-9. 

6. For an explanation of the 'seasonal ' periods of the Kondratiev 
prices cycle and their connection with the Marxist prices cycle, see 
chapter 10. 




Reclaiming Marx's Capital 

Reclaiming Marx's Capital: A Refutation of the Myth of Inconsist- 
ency by Andrew Kliman, published by Lexington Books 

This is an important book. In a nutshell, what Andrew Kliman shows is 
that Marx's laws of motion of capitalism (how capitalism works and does 
not work) are logically consistent and theoretically valid. 

Kliman's book is a compilation and summary of all the efforts of a few 
Marxist economists over the last 30 years to defend Marxist economic 
theory from critics (both bourgeois and those claiming to be Marxist)'. 

Over the last 100 years, various bourgeois economists, starting with the 
Austrian Eugen Bohm-Bawerk in 1896, the Russian Ladislaus von 
Bortkiewicz in 1896, the Italian Piero Sraffa in 1960 and the American 
economist Paul Samuelson in 1971 have all claimed that Marx's labour 
theory of value and its application to understanding how profitability under 
capitalism would move was logically inconsistent and/or just plain wrong. 

So overwhelming were these arguments that most economists, including 
most Marxist economists, accepted them. The eminent Marxist econo- 
mist Paul Sweezy swallowed the criticisms hook line and sinker in 1949 
when he republished both Bohm-Bawerk and Bortkiewicz's papers. 

Later in the 1970s, most Marxist academics accepted the arguments of 
Sraffa and the Japanese Marxist economist, Okishio, that Marx's errors 
meant that his law of the tendency of the rate of profit to fall under capi- 
talism was wrong theoretically. They included Michael Kidron and Andrew 
Glyn in the UK, among many others. 

For them, Marx could not explain the nature of capitalist exploitation con- 
sistently and could not provide a logical explanation of capitalist crisis 
either Thus, Marx's economic theories were shelved except by a few 
(including David Yaffe-, Guglielmo Carchedi, Alan Freeman and Andrew 



Kliman), who were quickly dubbed 'fundamentalists' unable to accept 

What were the main criticisms of the bourgeois and Marxist critics of 
Marx? The first deals with Marx's transformation of values of each com- 
modity (as measured by the labour time going into producing them) into 
prices of production (as measured by cost of production and the average 

Marx knew that his labour theory of value did not mean that each com- 
modity sold in the capitalist market would be priced according to the la- 
bour time needed to produce them. 

Competition under capitalism meant that profitability would tend to be 
equalised or averaged out across the economy. If a company or industry 
had a higher rate of profit, capital investment would move towards that 
sector and away from another in order to reap that extra profit. 

This would lead to an averaging out of the profit generated from the la- 
bour employed in all sectors. The labour value embodied in each com- 
modity would be transformed into a price of production that was based on 
the average profit across all sectors. That would differ from the labour 
value in the commodity, which was based on the labour time involved. 
Some of the surplus value generated from workers in one sector would 
have been transferred to another sector. 

But, Marx argued, this did not mean that the labour theory of value no 
longer provided an explanation of capitalist production because, in aggre- 
gate across the whole economy, the total value of all commodities would 
still equal the total prices of production; total surplus-value would equal 
total average profit and the rate of profit in value terms would equal the 
rate of profit in price terms for the whole economy. Thus, indirectly but 
decisively, the labour time appropriated by the capitalist into the value of 
production of commodities explained the prices of all commodities. 



It was this transformation that Bortlciewicz said did not workl He argued 
that Marx had made a crucial error in his analysis. If the value of a 
commodity is transformed into a price of production by an average profit, 
then Marx should also transform the values of the original investment in 
capital equipment (constant capital) and labour force (variable capital) 
into prices of production too. But if Marx had done that, then his formula 
would not lead to total values equalling total prices of production and/or 
total surplus-value equalling total profit. Thus Marx's theory of value falls 
to the ground. 

Kliman shows conclusively in his book that Bortkiewicz's 'correction' of 
Marx's 'error' (so readily accepted by many for over 100 years) is wrong. 
There is no need to transform the values of the inputs into the production 
process based on prices of the outputs. That is logically and temporally 

If you make a pair of trousers and price it according to the cost of the 
textiles and something for the wear and tear of the machinery and for the 
labour time involved, you don't then reprice the labour time or the ma- 
chines you used according to the price of trousers you have just made. 
That's because you have already spent the money on the machines, tex- 
tiles and labour. To do so is not only logically incorrect; it makes no sense 
of what happens in the real world. Thus Bortkiewicz's correction is wrong 
and Marx's solution to the transformation problem is perfectly valid. 

The other main criticism of Marx was on his law of the tendency of the 
rate of profit to fall. For Marx, this was the most important law of the 
motion of capitalism, because it showed that capitalism had an inherent 
tendency towards crisis and collapse. Capitalist production is production 
for profit and if profit should fall, capitalists may well stop production. 

Marx argued that the capitalist economy reproduces by increasingly using 
technology and equipment in place of the labour force in order to drive 
down costs and raise the productivity of labour. But, as the cost of ma- 
chinery rises relative to the cost of employing labour (what Marx called a 



rising organic composition of capital), the rate of profit will tend to fall 
because if it takes less labour time to make a commodity, its value (or 
price) would fall and thus tend to squeeze profitability. 

This law has been criticised and mauled by a succession of bourgeois 
economists. And in the 1970s it was rejected by those who claimed to be 
Marxists. They argued that Marx's conclusion was inconsistent with his 
assumption: because the rate of profit could not fall if the organic compo- 
sition of capital rose. This was not an empirical question; it was logically 

The most elegant mathematical refutation of Marx along these lines came 
from Nobuo Okishio", basing his ideas on Piero Sraffa, in turn a follower 
of the classical early 19"' century economist David Ricardo. 

Marx had said that no capitalist would willingly introduce a new method of 
production unless it increased his profitability. In other words, investment 
in new equipment must raise profitability for the capitalist, not lower it. 
That seemed to contradict Marx's law that increased investment in tech- 
nology relative to the labour force would tend to drive down profitability. 

Marx resolved this contradiction by explaining that, while the first capital- 
ist would increase profitability by introducing a new technique before oth- 
ers, once all the rest had done so, profitability would fall back and to an 
even lower level than before. 

Okishio denied this. His mathematical formula showed that, assuming 
there was no increase in real wages for the workers, any increase in the 
use of new technology would raise profitability and would never cause it 
to fall. After all, if the workers produced more in the same number of 
hours, productivity would rise and thus profitability: QED! 

Okishio's theorem was soon accepted as a devastating demolition of Marx's 
position. If you wanted a cause for the rate of profit to fall, you would 
have to look elsewhere, probably to a rise in the share of wages relative to 



profit (as argued by Ricardo back in 1819 and Sraffa in 1960 — and later 
empirically by Andrew Glyn in the 1 970s\). It meant that any explanation 
of crisis under capitalism could not rely on Marx's own theory. 

In his book, based on previous works and the work of others, Kliman 
provides a convincing refutation of Okishio's theorem. Okishio's theo- 
rem, ostensibly a correction of Marx, made a similar mistake to 
Bortkiewicz. If a new technology increases the productivity of the labour 
force, it lowers the value of labour time in the production of commodity. 
According to Marx, that will lower the value or price of production and 
tend to lower profitability, other things being equal. 

But, according to Okishio, a rising organic composition of capital will not 
squeeze profitability because a higher productivity of labour will immedi- 
ately (simultaneously) lower the costs of production involved in the new 
equipment and the wages of the labour force used in production and thus 
their prices. 

But again this is illogical, as Kliman explains. You cannot reduce the cost 
of production using the new prices achieved with the new technology 
because you have already spent it at the old prices. The new prices only 
apply to the next round of production. The process of production is not 
simultaneous, but temporal. You can do anything with mathematics, but if 
your assumptions are unrealistic, you will come up with unrealistic out- 

Moreover, Kliman shows that Okishio is not really correcting Marx, but 
completely distorting Marx's theory. Marx assumed from the start that 
the prices of inputs to production would differ from the prices of the out- 
put; he was not a simultaneist. 

Thus, the work of Kliman and others has been to reclaim Marx's eco- 
nomic theories through what they call a temporal single-system interpre- 
tation (TSSl). It is temporal because Marx's theory is dynamic. The 



prices of the inputs going into production do not change simultaneously in 
line with the prices of the outputs after production. 

And it is single-system in that Marx's labour theory of value is not di- 
vorced from the prices of capitalist production, but is integrally connected 
to them. You cannot have profits without surplus-value and you cannot 
have surplus-value without the appropriation of labour time by capitalists 
from workers. Thus Marx's economic theory of exploitation is logically 
consistent with the process of capitalist production. The creation of profit 
depends on the creation of surplus-value. 

There is one very important point in the book that Kliman emphasises. 
Kliman is not saying that Marx is empirically correct. It may not be that 
the rate of profit under capitalism will fall as the organic composition of 
capital rises, or the organic composition of capital may not rise under 
capitalism. Marx"s law of motion of capitalism may not fit the facts to 
explain economic crisis. That is the job of others to show or not. 

I can remember the debates in the mid-1970s that some of us had with 
Andrew Glyn and others over whether Marx"s "orthodox' theory of the 
rising organic composition of capital and the tendency of the rate of profit 
to fall was valid both theoretically and empirically. We knew instinctively 
that Marx had not got it wrong and his iterative solution to the introduction 
of new technology and the rate of profit made sense. But we struggled 
with the arguments of the neo-Ricardians of the Sraffa variety or the 
Marxists who followed Sraffa. Their revelations about Marx's 'mistakes' 
in Capital and their apparently impeccable algebra left us puzzled, even 

What Kliman has done is summarise the arguments of the defenders of 
Marx's economic theory. He shows that a proper reading of Marx's 
Capital reveals a coherent theory of capitalist production from the labour 
theory of value and a logically consistent explanation of the movement of 



He has stripped away the obfuscations of the neo-Ricardians. Marx did 
not make theoretical errors (at least in the areas that the critics have 
claimed and others have accepted for over one hundred years since Vol- 
ume 3 of Capital came out). And for that, Kliman must be thanked. 

Kliman makes every effort to make his book simple and easy to follow. 
But even so, many of the arguments are complex and those who do not 
have some knowledge of Marxist economics may find it difficult. But it is 
worth persevering, because those who digest the arguments in the book 
will come away with formidable weapons to defend Marxist economic 

1. See Andrew Kliman, Alan Freeman and Julien Wells eds, The 
new value controversy and the foundations of economics, 2004. 

2. See Yaffe s early defence in The Marxian theory of crisis, capital 
and the state, 1972. 

3. Ladislaus von Bortkiewicz, Value and price in the Marxian system, 

4. N Okishio, Technical change and the rate of profit, Kobe Univer- 
sity Economic Review, 1961. 

5. A Glyn and B Sutcliffe, British Capitalism, the workers and the 
profits squeeze, 1972. 



March 2007 


The mass of profit and crisis 

The data for the US economy show that the rate of profit has resumed its 
downward phase after a significant recovery from the low of 200 1 . In 
2006, the rate of profit fell and that was repeated in 2007. 

The falling rate of profit does not generate an economic recession or 
slump, it merely indicates that it is coming, if the fall is sustained. Indeed, 
as the rate of profit falls, capitalists make even greater efforts to boost the 
mass of profit by expanding constant and variable capital. So the mass of 
profit will rise as the rate of profit falls. 

"The number of labourers employed by capital, hence the absolute 
mass of the labour set in motion by it, and therefore the absolute 
mass of surplus labour absorbed by it, the mass of the surplus 
value produced by it, and therefore the absolute mass of the profit 
produced by it, can consequently increase, and increase progres- 

The Marxist rate of profit for the US economy 1982-07(value rate of 

profit (VROP %) and organic composition of capital ratio 

21.0 - 


r 2.30 

20.0 - 


- 2.25 

- 2.20 

19.0 - 

- 2.15 

18.0 - 

^\ r—^ \/ 

- 2.10 

17.0 - 
16.0 - 

1 ^^y 

- 2.05 

- 2.00 

- 1.95 

15.0 - 

- 1.90 

- 1.85 

14.0 - 

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 

[ 1.80 



Rate of profit - LHS — Organic composition - RHS 



sively, in spite of the progressive drop in the rate of profit. And this 
not only can be so. Aside from temporary fluctuations it must be so, 
on the basis of capitalist production." Capital (1959, p. 218) 

The trigger point for economic crisis will be when the rate of profit falls 
enough to bring about a slowdown and contraction in the mass of profit. 
At that point, capitalists will stop investing: there will be a strike of capital. 
That was certainly Marx's view: "Accumulation depends not only on 
the rate of profit but on the amount of profit" Capital (1969, p. 536). 
"A portion of the capital would lie completely or partially idle (be- 
cause it would have to crowd out some of the active capital before it 
could expand its own value), and the other portion would produce 
values at a lower rate of profit owing to the pressure of unemployed 
or but partly employed capital ... The fall in the rate of profit would 
then be accompanied by an absolute decline in its mass ... And the 
reduced mass of profit would have to be calculated on an increased 
total capital. " Capital (1959, p. 252) 

But more than this, we can pinpoint another trigger within the mass of 
profit. Capitalists must eat and live. Capitalism may be a system of 
production for profit that is driven by the cry of accumulate, accumulate! 
But capitalists cannot live on air. 

So a portion of the mass of surplus value must be diverted into consump- 
tion and away from available resources for new investment in plant and 
labour. Thus the mass of profit produced in one period can be divided in 
the next period into an accumulation of constant capital and variable capi- 
tal plus capitalist consumption. Now if the mass of profit produced in the 
previous period is unsufficient to sustain investment and for capitalists to 
consume at previous levels, there will be a crisis. So another trigger for 
slump would be a fall in capitalist consumption-. 

As the rate of profit falls over a period, the pressure is on both an eventual 
reduction in the mass of profit and probably before that, on a reduction in 
capitalist consumption. If capitalist consumption begins to decline or even 



not increase at previous levels, capitalists will stop accumulation. So eco- 
nomic recession will begin even before the mass of profit fallsl 

Can this argument be validated by empirical evidence? It certainly can. 
Let's look at the US economy since 2005 to see if the level of the mass of 
profit and capitalist consumption can reveal a capitalist slump. First, look 
at our regular graphic showing the US rate of profit. The fall in the rate 
was resumed in 2006. What happened to the mass of profit?" 

Well, the mass of profit kept on rising right through to 2008, even though 
the rate of profit was falling. But in 2009, the mass of profit fell — the 
Great Recession had arrived. Capitalist consumption was an even better 
indicator of impending slump. It rose through to 2007 but then fell slightly 
in 2008, before the mass of profit. It was a clear forward indicator of the 
Great Recession. 

The rate of profit (%), the mass of profit and capitalist consumption in 
the US economy, 2005-1 5 forecast, $bn 

6000 J 
5500 - 
5000 - 
4500 - 
4000 - 
3500 - 
3000 - 
2500 - 
2000 - 




2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 
□ Mass of profit ■ Cap cons — ROP - RHS 



If we make reasonable assumptions about future accumulation of capital 
and the rate of surplus value from 2009 onwards, we can forecast whether 
we are in for another capitalist slump. 

On those assumptions, the rate of profit should make a marginal recovery 
up to 2012 and then start to fall again. However, capitalist consumption 
will continue to be squeezed and although the mass of profit would go on 
rising up to 20 14, eventually the capitalists will have had enough accumu- 
lating at the expense of their living standards. They will reinstitute a strike 
of capital to boost capitalist consumption. A new slump will ensue around 

The rate of profit will now reach a low not seen since the bottom of the 
last downphase in the profit cycle, in 1982, and it may even be lower The 
organic composition of capital will have reached a new high not seen for 
70 years. The slump will have to be substantial to destroy capital values 
sufficiently to restore profitability. 

1. The data have been updated to 2009 with forecasts added 
through to 2015. 

2. Much of this argument has been taken from Henryk Grossman s 
book, The law of accumulation and the breakdown of the capitalist 
system, 1992. 

3. See Appendix B for an analysis of how the mass of profit can 
vary with the rate. 

4. The following passages have been updated to 2009. 


The Great Recession 
— during 

The Great Depression was (and in many ways) remains a great 

puzzle as there were miUions of the world's citizens who wanted to 

consume more housing, food and clothing; and producers by the 

hundreds of thousands who wanted to manufacture more housing, 

food and clothing and yet the two sides could not get together. 
Why? What was preventing these economically improving, mutually 
beneficial exchanges from taking place? What was it that pre- 
vented people from working and producing more? ...At this mo- 
ment, (the answer) remains largely unknown". Randall E Parker 
from The Economics of the Great Depression, 2009 




Stock markets in turmoil 

Over the last few days, world stock markets have taken significant plunges. 
It all appeared to start in China. The Beijing government hinted that specu- 
lation on the Shanghai stock exchange was getting out of hand and the 
government may have to introduce a special tax on capital gains being 
made. That produced a 10% fall in prices, the biggest daily drop in ten 

It was ironic that the Chinese government should make this call. Only six 
months before they had declared open day for stock market speculators, 
easing restrictions and announcing big sales of shares in state companies. 
The stock market jumped 100% in just half a year! Now the pain is fol- 
lowing the gain. It also shows how the turn towards capitalism driven by 
the so-called "Communist" leaders has exposed China's economy to the 
gyrations of capitalist volatility. 

But the stock market plunge did not just affect China. It soon spread to 
the stock markets of Japan, Europe and the US. They fell by 3-4% in a 
day, not a huge fall but significant after the steady rise that these markets 
have seen since last summer. 

That a hiccup in China should ripple throughout the world's stock markets 
shows how globalised capitalism, particularly its finance sector, has be- 
come. Truly, chaos theory applies in the anarchy of world capitalism: when 
the Beijing butterfly flaps its wings, the snow falls on New York. 

The problem was compounded by two other events. US economic data 
were released that suggested that the US economy may be slowing down 
much faster than markets expected. It appeared that real GDP growth in 
the US in the last quarter of 2006 was only just above 2% rather than 
3.5% previously estimated. 

Also, the former chairman of the US central bank, Alan Greenspan, made 
a video speech to investors in Hong Kong (for $150,000 by the way!) in 



which he said that there was a possibility of economic recession in the US 
in 2007. 

All this was enough to spook investors into selling their stocks. Yesterday, 
the US stock market seemed to stabilise. But today the falls have contin- 
ued in China, Japan, Europe and the US. 

How far can this go? It depends on how you analyse the causes of the 
fall-back. The capitalist optimists argue that there is nothing wrong with 
the fundamentals of capitalist growth: employment is good, profits are 
good, interest rates are lowish, inflation is under control. So this stock 
market fall is just a healthy "correction" that will end soon, before the 
market starts going up again — just as it did last summer after a "correc- 

This is the view of the majority and the current Federal Reserve Chair- 
man who succeeded, Greenspan, Ben Bernanke. Speaking to Congress, 
yesterday, Bernanke was at pains to tell the senators that all was well. 
The US market stabilised (briefly) on his words. 

However, there are others who argue that the US financial markets have 
become way overpriced because of 'excessive' credit in the economy. 
Huge money piles are being ploughed into buying up companies through 
so-called 'private equity' deals and into lending money for property and 
share deals. Money is not going into productive investment (indeed invest- 
ment into new plant and machinery is hardly growing in the US), so it is 
being squandered. 

Such is the excess that any sign that the great manufacturing power- 
houses of Asia, particularly China, could be slowing down and thus driving 
up inflation and slowing world growth could easily set off a collapse in 
stock prices and drive the world into recession. 

My view is different. The key to understanding the health of capitalism is 
profitability. US and global profits have rocketed up since the recession of 



200 1 . However, much of these profits are not available to industry (they 
have been siphoned off from the productive sectors of the economy into 
the financial sector). Moreover, although profitability has risen in the last 
five years, supporting higher stock prices, it is still below the levels achieved 
in 1997. 

Most important, profitability is set to fall from here. US productivity growth 
is slowing and costs of production are rising compared to growth in sales. 
Sales are dropping off as the US housing market slumps. Also, the cost of 
borrowing has risen as the Federal Reserve has hiked up interest rates. 

The profits squeeze will steadily grow over the next few years. That will 
weaken enthusiasm for the stock market. Eventually profitability will fall 
to levels that will provoke an economic slump and a sustained fall in the 
stock market. 

This current stock market fall probably won't lead to any crash and an 
immediate economic recession. But it is an indicator of the future deterio- 
ration of the health of global capitalism that will unfold over the next few 




More stock market nerves 

The nerves of stock market speculators cannot be in too good a shape 
these days. Wall Street has just suffered its second biggest point drop in 
four years. This immediately spread to Asian stocks markets that suf- 
fered serious falls. 

World stock markets continue to take a turn for the worse. The latest 
concern of speculators is not just a possible slowdown in the US economy 
hitting economic growth in the rest of the world. It is also the collateral 
damage from the falling US real estate market. 

In the great bubble that was US housing in the five years up to summer 
2005, many Americans started to speculate in house purchases, while 
others were desperate to get on the housing ladder. So they looked for 
mortgage loans that they could ill afford. The banks and finance houses of 
Wall Street were happy to lend these dubious borrowers the money, given 
the boom in the homes market. 

These 'sub-prime' loans, as they were called, were hugely risl<y for the 
borrowers and would be a disaster for the banks if the housing market 
collapsed. And it did. House prices have dropped from rising 15% a year 
in 2005 to an absolute fall now. 

As a result, many sub-prime borrowers have gone bust and cannot pay 
their mortgage payments. The latest figures showing nearly 14% of such 
borrowers in default sparked off the fall in stock markets yesterday. 

Of course, most mortgage borrowers and homeowners are not sub-prime. 
These high interest-rate loans are just 10% of the total mortgage market. 
But the worry is that many banks have packaged up their loans in the sub- 
prime market and 'sold' them on to other banks. This diversification of 
risk means that sizeable sections of the mortgage industry are 'exposed' 
to the sub-prime market. 



Now the second-largest sub-prime lender, New Century, has said that it 
cannot pay back its creditors and lots of small sub-prime lenders have 
gone to the wall. The risk of a general financial sector default has risen. 

Some bourgeois investors are worried that a further collapse will weaken 
the US economy further and cause a "domino' effect across the world. 

Stock markets are now down by about 6% since the latest scares began, 
still less than the sell-off in May 2005. But even if markets should eventu- 
ally recover again as they did last year, this ripple is yet another confirma- 
tion that it is only a matter of a relatively short time (six months to three 
years) before a major downturn in the financial sector (and with it, the 
rest of economy) takes place. 



The rocky road to ruin 

Over the past 15 years production has risen at about 3% a year in the 
OECD countries, while money supply, mortgage and company debt, per- 
sonal borrowing and the massive so-called derivatives market based on 
this credit have increased at over 25% a year! Result? A huge bubble 
which is now bursting, starting with Northern Rock in the UK. 

They started queuing first thing in the morning. They wanted to get their 
hard-earned savings out as soon as possible. Northern Rock, Britain's 
fifth-largest mortgage bank was going bust. It had announced that it could 
not raise enough funds in the interbank market to finance its mortgage 
lending or meet its obligations any more. Disaster! 

Tens of thousands of savers who had put their money in Northern Rock 
faced huge losses. As they said in the queues: "We are elderly and this is 
our life saving," said Sheila Smith, who came with her husband, Arthur, to 
withdraw all their money from the bank's Moorgate branch in central 
London. "We can't afford to lose it." 

A 61 -year-old retired health service consultant from Sidcup was following 
suit, having spent more than an hour getting into the city after a morning of 
failed phone calls to his local branch. "1 put all my savings in one basket 
and the best thing to do is to get out of this basket," he said. Michael 
Ribotham, 74, could not see any point in leaving his money in a bank with 
such big problems. "I'm not young and don't have a chance to make it 
back again." 

There were similar stories at a branch in the bank's home of Newcastle 
upon Tyne, whose football team carries the Northern Rock logo. "I've 
been thinking about it all night," said 72-year-old pensioner Mary Bow- 
man, who had £38,000 in a Northern Rock Silver Saver account with her 
retired miner husband. "It's our burial money and everything," she said. 



It was no good the government, the Bank of England or so-called experts 
announcing on the radio and TV that there was no need to panic, that 
deposits were safe. First, the banking industry's so-called deposit insur- 
ance only covered the first £2000 of savings and then only 90% of the 
next £33,000. After that, any savings were not covered and anyway it 
could take months before getting money back if Northern Rock collapsed. 

David Clark, a 61 -year-old builder, said he did not believe official assur- 
ances about anything financial: "It's just like football managers. Their jobs 
are guaranteed, then they are sacked the next day." 

June Barnes, a special needs guide, and her husband Edward, a retired 
road worker, left the branch with £500 of their £20,000 savings, the most 
they could withdraw, and plan to come back every day to do the same. 
"It's all right people saying don't panic, but at the end of the day you've 
worked hard for what you have in the bank," said Mrs Barnes. 

Many in the queues just did not believe the government. "Tony Blair lied 
to us about Iraq and many other things. Gordon Brown went along with 
him: why should we believe these people now?" 

The collapse of Northern Rock sums up the mushrooming financial crisis 
that is spreading across the capitalist world. The last 15 years since the 
last major economic recession of the early 1990s has seen an expansion 
of capitalism built on an unprecedented growth in financial credit globally. 
While annual real production has risen at about 3% a year in the OECD 
countries, money supply, mortgage and company debt, personal borrow- 
ing and the massive so-called derivatives market based on this credit has 
increased at over 25% a year! 

Never has capitalism been so dependent on its financial sector. Never has 
the financial sector been such a major contributor to profit. This is what 
Marx called 'fictitious capital' . The boom of the 1 990s and of the last four 
years or so has not been mainly based on an expansion of real production 
(at least not in the advanced capitalist countries). No, it has been based on 



huge spending by American and British households, financed by a vast 
increase in debt. Households no longer save anything, they just borrow. 

How can they do that? Well, it's because there has been a boom in the 
paper prices of stocks and shares (which bust in 2000) and above all in 
housing. Across most of the advanced capitalist world, cheap credit and 
wild mortgage lending by banks has inspired a massive increase in the 
price of real estate. 

Much of the world's value-creating production has been siphoned off by 
the banking system (mainly based in New York and London) into a Ponzi- 
like^ pyramid of credit that fuels an unproductive sector of land and bricks. 
China and Asia's massive export surpluses have been 'recycled' through 
the banking system into buying mortgage debt, bonds and shares of Ameri- 
can households and companies. 

This has been possible because American and British banks have devel- 
oped 'clever' new ways of spreading the risk of lending. If they lend 
billions in cheap mortgages, they then take the mortgages and 'batch' 
them up into debt packages that they sell onto other banks, hedge funds 
and other financial institutions around the world. 

They called these new debt instruments 'asset-backed securities' because 
they were backed by assets (namely mortgages and houses). Investors 
buy them because the interest on them is much higher than anything else 
and it is safe — isn't it?, because everywhere house prices are rocketing 
and people can afford to make their payments. So risk is spread around 
and everybody is happy. 

Well, not any more. If credit is expanded at geometric rates and the pro- 
duction of real things that add value cannot keep pace, then inflation be- 
gins to enter the capitalist system. For years, inflation did not appear be- 
cause the cheap slave labour of billions of workers in China, India and 
Latin America kept prices of traded goods low. But that began to stop 
about a year ago as labour markets tightened in Asia. 



Also, as more and more money went into the financial sector or into 'serv- 
ices', labour shortages and higher costs appeared in the OECD econo- 
mies. The central banks of these countries began to hike interest rates to 
control inflation. Mortgage rates began to rise and the cost of financing 

What kicked off the crisis was the collapse of the US homes market. 
From mid-2005, prices stopped rising at astronomical rates, then slowed 
sharply and finally by the end of 2006 started to fall. This was particularly 
bad news for those borrowers who had lied about what they earned or 
were offered mortgages with no attempt by the banks to check on whether 
the borrowers had incomes to justify repayments. 

These were called 'sub-prime' loans (not the best prime ones). Only 10% 
of the US mortgage market was in sub-prime loans, but the problem was 
that the banks had 'batched' all these loans in packages with prime loans 
and sold them on around the world. So nearly every bank in the world had 
bought part of these 'junk' loans or asset-backed securities. Then the 
asset part disappeared in a puff of smoke. So all the banks were all hable, 
as sub-prime borrowers started to default on their payments. The world 
credit crisis began. 

The irony is that Northern Rock never lent to American houseowners, 
never mind the high-risk ones who are now defaulting in droves and bad 
debts on its British mortgages are close to record lows. Yet it is the first 
bank to need bailing out since new rules allowing rescues were introduced 
in 1988. 

The reason is that Northern Rock was only in the mortgage business 
because it could borrow money from other banks at very cheap rates to 
finance mortgage lending. Back in the early 1990s, Northern had been a 
steady building society based in Newcastle, only lending based on depos- 
its it got from people who put them with it. 



But then came the property boom and the great 'new ways' of raising 
credit. Northern turned itself into a bank with shareholders and launched 
an aggressive strategy of lending cheap to householders. In January this 
year, the management were being feted by their shareholders for boosting 
profits and taking the biggest share of new mortgages in Britain — they 
got awards for being so clever! 

Then came the credit crunch. Because house prices were collapsing in 
the US and mortgages were being defaulted, banks were no longer sure 
that the all the mortgage debt was worth what they had paid for it. So they 
stopped buying any more. Lots of small funds in this mortgage-backed 
security business went bust, as did a big US mortgage bank, American 
Mortgage Securities. Then America's biggest mortgage lender. 
Countrywide, announced huge losses and job cuts. 

The banking world panicked. They stopped lending, even to each other. 
The crunch spread around the world. European banks that had bought 
these junk bonds from American banks also went under (1KB and Saxon 
in the US). Northern depended on borrowing from other banks as its sav- 
ers in Newcastle and around Britain were not enough to finance its break- 
neck pace of lending. Now it could not raise money. After a few weeks of 
struggle as the interbank loan markets stayed dry and interest rates rock- 
eted. Northern Rock gave up the ghost and asked the Bank of England to 
bail them out. 

The banks may be in the line of fire now, but it will be ordinary working 
people who will feel the pain: the savers, the home owners as home prices 
plummet in the UK and, of course, the workers in the banks and mortgage 
lenders who will soon lose their jobs. 

Mortgage rates are now rising. The cost of owning a home in Britain will 
become even more nightmarish. Already, mortgage interest payments are 
taking up a bigger share of our income — the average is 17.4% — than at 
any time since the early 1990s housing crash. And the average rate has 



risen from 4.67% in July 2005 to 6.1%. Any additional rise will further 
stretch borrowers. 

The long-forecast end to Britain's 1 8-year housing boom is drawing closer 
In September, there was a 2.6% drop. A survey by Rightmove, the prop- 
erty website, showed the average asking price in the UK was £235,176; 
down from £241,474 in August. And the average property sat on the mar- 
ket for 86 days compared to only 70 in May. The number of properties for 
sale per estate agent has also risen; from 52 in December to nearly 66 

The reaction of the institutions of capitalism and the New Labour govern- 
ment has been nothing short of a joke, if it wasn't so painful for ordinary 
people. Only two days before the Northern Rock crisis broke, the gover- 
nor of the Bank of England, Mervyn King, had told a parliamentary com- 
mittee that there was no way that the Bank would 'bail out' banlcs and 
investors who got into trouble because they has invested speculatively 
and unwisely in sub-prime loans and other risky ventures. 

And yet King had to do a somersault when it was clear that Northern 
Rock was going under and announce it would after all fund Northern. The 
new Chancellor of Exchequer, Alastair Darling, who took over from Gordon 
Brown when he became prime minister, had obviously panicked. He de- 
manded that King provide funds immediately to Northern. He realised 
that thousands of Labour voters would be demanding blood if their sav- 
ings were forfeited and their mortgages called in. 

Even more serious, it was clear that if Northern went down, so would a 
number of other banks with similar balance sheets and there would be the 
biggest banking crisis since the 1930s. The Bank's actions did not stop the 
run on the Northern branches. The shares of other banks also tumbled 
and the cost of borrowing between banks continued to reach extreme 
levels. Britain's banking system was seizing up. 



So late on Monday evening, 17 September, Darling announced (stuttering 
and stammering his speech, looking like a rabbit caught in the headlights) 
that all the deposits of Northern Rock savers would be honoured by the 
government. In effect, the government had nationalised the bank. Also, he 
was opening up the condition that if other banks go under, their depositors 
would also be repaid in full. So the whole banking system in Britain was 
now backed by the taxpayer. 

Quite right that hard earned money saved by British people should not be 
lost because of the casino gambling of the global banking system going 
wrong. But if deposits are to be saved at the taxpayer's expense, should 
not ownership of the banks also pass to the people? What could be a more 
conclusive condemnation of capitalism than this boom and bust cycle in 
global financial markets? People's money is not safe with capitalists — 
only a democratically accountable state system can make it so. 

And this financial crisis and credit crunch is just the beginning. From here, 
tightening credit markets and rising interest rates will mean falling profit- 
ability for capitalist companies and slowing production, possibly even eco- 
nomic slump, as American, British and European householders have to 
tighten their belts. 

First watch out for serious falls in the profits of the big banks around the 
world. That will be followed by job cuts throughout the financial sector. 
And job cuts will mean less income to finance property purchases and 
mortgages. House prices could plummet. 

Never in the history of capitalism has the financial sector been so impor- 
tant to the health of capitalism. In its maturity, capitalism is increasingly no 
longer a system that raises the productive forces. It is more and more a 
financial parasite unproductively resting on top of the productive sectors 
of the global economy (mainly in China, India etc). 

That is especially so in Britain, the financial parasite extraordinaire — a 
giant Switzerland, that sucks in the earnings of other countries (oil-pro- 



ducers in the Middle East and the manufacturers of Asia) and recycles it. 
British capitalism now makes little itself Instead, it is just the banker to 
the world. As such, the British capitalist economy is the most vulnerable 
to a global financial crisis and any ensuing economic slump. And British 
workers and their families will suffer more than most. 

1. Named after the most notorious of these scams carried out by Charles 
Ponzi in 1920. 



Credit crunch! 

Everywhere the cry is: credit crunch! You can smell the sweat on the 
brows of bankers as their necks are squeezed by the tightening credit 
noose. In all the offices of the great investment banks of Wall Street, the 
City of London and gnomes of Zurich, you can hear the hissing sound of 
the global financial bubble bursting and deflating. 

Whereas just a few months ago there seemed no end to the upward drive 
of stock market prices and availability of loans to buy companies, build 
skyscrapers or invest in ever-mushrooming condominiums from San Di- 
ego to Shoreditch and Shanghai; now all has changed. An abyss has opened 
up before the financial sector of capitahsm. 

Every day another huge global bank announces that it has had to 'write 
off the value of assets that it has bought (mortgage loans for houses in 
the US or bonds that are 'backed' by the value of mortgages in America). 
It's $10bn for Citibank, $5bn for HSBC, $8bn for Merrill Lynch and so on. 
So far, the banks have fessed up to $60bn of losses. 

And heads have rolled. The head of Citibank, the biggest bank in the 
world (until a Chinese bank surpassed it last month when it launched on 
the stock exchange), has been sacked and forced into taking a redun- 
dancy package worth $I50m. He was followed by the head of the biggest 
investment bank in the world, Merrill Lynch. 

And around the world, smaller banks and financial institutions have not 
just lost money, but have gone bust. In the UK, it was Northern Rock, a 
lender of mortgages in the north of England. Big mortgage lenders have 
gone bust in the US. The biggest American lender. Countrywide, is on the 
brink with huge losses recorded. Desperately, the big banks are trying to 
drum up a special fund worth $75bn to help fund lots of small 'Special 
Purpose Vehicles' that they originally set up to make extra profit. 



Even supposedly 'safe and prudent' financial institutions like company or 
local government pension funds have been burnt. Few people in the re- 
mote Norwegian town of Narvik, 200km north of the Arctic Circle where 
the sun has disappeared until January, were likely to have given a lot of 
thought to the credit squeeze sweeping the global money markets — that 
is, until it now threatens their wages over Christmas. 

Narvik, along with three other similarly isolated towns of Hemnes, Rana 
and Hattfjelldal, has become the latest community to discover just how 
directly even the most remote places can be affected by the financial 
turmoil after it made multi-million dollar bets on complicated US-linked 
financial products. 

The towns invested about $96m (€65m) in complex products linked to 
unspecified municipal bonds in the US, designed by Citigroup, and sold to 
them by Terra Securities, the investment banking arm of one of Norway's 
leading banking groups. Now representatives of the towns have admitted 
that recent market movements linked to the credit crisis had destroyed 
most of the value of their investments. 

The great credit crunch is not located just in the US, but is everywhere. 
And it's only just begun. The OECD estimates that the final losses from 
this credit contraction will be $300bn. Other bank estimates put the hit at 
$400-5 OObn, or about 1% of global annual output. 

It's going to be that big because the start of the problem was in the US 
housing market. Way back in the early 2000s, a huge boom began in the 
US residential property market, not dissimilar to the boom in the commer- 
cial (factories and offices) property market that started in the mid-1980s 
in the US. As money flowed into the property market, mortgage rates 
plummeted and banks began to offer easier and easier loan arrangements. 

Whereas before, the usual US mortgage for 75% of the value of the 
house was at a fixed rate for 30 years, while house prices rose at a mod- 
erate 3-5% a year, now you could get a 100% (or even more) mortgage at 



a special discount rate of near zero for the first few years, with even the 
cost of paying that 'back ended' to the cost of the loan, which could be 
just ten years. 

Moreover, if you could not prove that you had a good steady job with 
income to pay the loan, it did not matter. Because house prices were now 
rising at 15% a year, you could easily cover the cost by selling on or 
borrowing more later Banks would lend what they called 'sub-prime' 
mortgages (so-called because they were made to riskier borrowers) with- 
out compunction. 

The housing boom took off as the Federal Reserve Bank cut interest rates 
down to 1% and the head of the bank then, Alan Greenspan, declared 
publicly that it was a great idea to borrow more and spend to keep the US 
economy motoring. However, in June 2005, things began to turn for the 
worse. First, rising inflation forced the Fed to reverse its policy and begin 
to hike interest rates. It did so for the next 18 months from 1% to 5.25%. 
Mortgage rates rose sharply and borrowers began to feel the pinch. 

Most important, house prices had got so far ahead of incomes, which for 
the average American family had hardly moved, that lots of new homes 
coming onto the market were no longer affordable. Builders found that 
they could not shift their new condos without massive discounts and in- 
centives. Eventually, even that was not enough and those sub-prime bor- 
rowers who had bought without adequate incomes or had done 'buy to 
lets', with the hope of 'flipping' their purchases quickly into sales, could no 
longer afford it. 

Defaults on sub-prime mortgages rose from 3% to 15% in a year. Lend- 
ers suddenly found that their highly lucrative mortgage incomes were drop- 
ping fast. And here is where the problem got so much worse. 

In the great new world of the global finance capital, the mortgage lenders 
had not kept these mortgages on their books. They went to other banks 
and particularly to smaller financial organisations like hedge funds (funded 



by blocks of capital set up by some financiers using the money of very 
rich people and promising them huge returns) and said: look why don't 
you buy a block of mortgages from us? 

Some mortgages will be prime (good credit) mortgages and some will be 
sub-prime. But a batch of this mortgage debt (a mortgage-backed asset) 
will pay a lot more than interest at the bank or even interest from a gov- 
ernment bond. And don't worry, it's really safe because house prices are 
going up and up and anyway your batch of mortgages includes lots of 
good safe ones. 

And then the banks went to insurance brokers and said: why don't you 
offer insurance on these mortgages defaulting? It's not going to happen so 
you can make money selling premiums to the buyers of our mortgage- 
backed securities. And they did. 

Soon everybody and his dog was buying and selling mortgage securities 
around the world. Sub-prime mortgage securities reached $3tm globally 
and prime mortgages reached another $25trn. 

This was similar to what the savings and loans banks in the US did in the 
1980s. They were very small savings banks that collected the savings of 
all the people in the small towns of mid-America. Then they lent their 
money to local businesses to build offices, factories and develop. 

A boom in commercial property broke out as interest rates fell and the 
owners of these small banks thought they were onto a winner. They be- 
gan to lend to commercial businesses in a big way and got involved in lots 
of big commercial projects offering very good fixed rates of return. But 
then, interest rates began to rise as inflation exploded in the late 1980s. 
These banks found they had to pay higher rates to depositors, but could 
not raise rates to their business borrowers. The banks went bust, or their 
owners did a runner with the local people's deposits. 



Both the savings and loans disaster in 1980s and the sub-prime crisis now 
are examples of how a corrupt and greedy capitalism tries to maintain 
economic momentum by turning to unproductive sectors because the pro- 
ductive sectors have weakened. 

In the US, the rate of profit earned by all sectors of capitalist investment 
peaked in 1997'. As explained by Marx, capitalists are continually trying 
to increase the profit they make out of their workers. If they don't, then 
their competitors will undercut them in price or invest more to lower costs. 

This competition drives capitalists to find new ways of raising profits. 
Once they have exhausted the exploitation of the workforce, they can 
only raise profit by using new labour-saving forms of technology. That 
requires extra capital invested in machinery and plant over labour. This 
rising proportion (that Marx called the organic composition of capital) be- 
gins to drive the rate of profit down just as the mass or overall total of 
profit rises. Eventually, the falling rate of profit will exert enough influence 
to stop the mass of profit rising. 

That process began in earnest in 1997. Eventually the hi-tech boom of the 
1990s burst in a stock market collapse of 2000 and the mass of profit 
stopped rising in 200 1 and there was mild recession. But the recession 
was only mild because capitalism tried to keep the system going by the 
expansion of credit into unproductive areas like finance and property. The 
boom in property provided a cushion against the collapse of productive 
forces. It even reversed the fall in profitability for a while, from 2002 to 
2006. Employment and economic growth also picked up. 

But to achieve this, there had to be a huge expansion of money credit, 
indeed the largest in capitalist history. Marx called this fictitious capital. 
Credit is money supply (printing banknotes and increasing bank reserves), 
debt (issuance of bonds and loans) and stock market values (increased 
prices for buying and selling shares in companies). When this expands 
way beyond the accumulation of real capital, it is fictitious. The prices of 
shares, bond and houses do not match the value appropriated by capital- 



ists from the sale of things and services produced by workers in factories, 
offices and transport facilities, namely profits. 

So, just as the rate of profit started to fall, fictitious capital exploded 
(graphic)-. In the first seven years of the decade of 2000, fictitious capital 
grew at over 25% a year compared to the growth of real production in the 
capitalist world (up a maximum of 5-7% a year). Money supply printed by 
the central banks rose about 7% a year, while banks increased loans by 
over 10% a year. And then there was the issuance of bonds by big com- 
panies and governments. That form of credit rose by over 15% a year to 
reach $73tm by 2006, or around 140% of world annual production. 

But the most staggering part of the explosion of fictitious capital was in 
the value of what are called derivative contracts. Of the $70trn in debt, 
about $lltrn was 'sold on' over and over again in various contracts de- 
rived from that debt. These derivatives, in essence bets on the future 
value of a bond, a mortgage or a share, rose in value to a staggering 
$550tm, or 11 times annual world output. 

Fictitious capital and the US rate of prof it(%) 

210 - 
200 - 



190 - 
180 - 
170 - 
160 - 



150 - 
140 - 

J' \j \ 


130 - 

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 


1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 

- - Global Credit/GDP LHS — US Marxist rate of profit - RHS 


This made for easy money, allowing borrowers to buy property, shares 
and other assets by the bucketful. But most of this expansion of credit 
was into unproductive sectors of the capitalist economy — sure, it deliv- 
ered jobs and income, but as Marx explained, under capitalism, it was 
unproductive because it did not create value that could be used to reinvest 
in new production and drive the economy forward. Indeed, as more and 
more money went into the stock or property markets, less and less was 
available for investment in industry, new technology or better skills for the 

It has been a feature of modem capitalism in its declining phase for capital 
to be invested more in unproductive rather than productive sectors. For 
example, the financial sector now contributes 30% of the profits of capi- 
talist businesses in the US. Strip that away and the productive sectors of 
the economy are not doing well. Indeed, the underlying rate of profit has 
fallen over a period of decades, even though there are long periods when 
it risesl The credit crisis is the other side of the coin. Once the US 
property market began to collapse from summer 2005 onwards, so the 
massive credit boom was revealed for what it was — a fantasy, not based 
on real values. 

Now the credit bubble has burst just like the hi-tech dot com bubble burst 
in 2000; and just like the savings and loans bubble in commercial mort- 
gages did in the mid 1980s in the US; and just like the credit bubble in 
Japan did at the end of the 1980s. 

Banks are now losing money hand over fist. So are the clever hedge 
funds and insurance brokers. Credit is contracting fast, as fictitious capital 
goes up in smoke and the real level of values is revealed. This real value 
will be found at a much lower level of production, employment and in- 
come — and of course, at a much lower level of profit. 

The collapse in credit will be just as severe over the next few years as the 
expansion of fictitious capital was in the last five. And this time, the profit 
cycle is also in a long-term downward cycle that still has some way to go 



to reach the bottom. And we remain in a long-term downward cycle for 
share prices, which express the confidence that capitalists have in their 
own system. Finally, the global property market is dropping too, not just in 
the US, but also in the UK, Europe and later in parts of Asia. 

Everywhere the arrows are pointing down for capitalism. This synchro- 
nised downturn in profitability, credit, stock and property prices heralds a 
major economic slump by 2009-10, or even earlier. The credit crunch will 
lead to the worst global failure of capitalist production since 1980-2 and 
perhaps even as bad as 1929-33. 

1. See chapter 6. 

2. The graphic has been updated to 2008. 

3. See chapter 7. 




Panic! The world's stock markets had their sharpest fall since 9/11 on 
Monday 2 1 January. It is supposed to be the most miserable day in the 
year in the Northern hemisphere, where the daylight is short, the weather 
is bad, people have colds and flu and they have run up debts from Christ- 
mas. But this year, it really was a Black Monday for capitalism. 

World stock markets are now down over 20% from their highs set just last 
November. That technically is called a 'bear market'. Stock markets have 
had their worst start in a year for 30 years and in the case of the US and 
the UK, the worst start ever since records began! 

Why the panic? Up to Christmas, stock markets were generally static, not 
falling much. Capitalist investors were 'in denial' as the psychiatrists say. 
They knew that there was a problem in credit and debt markets, because 
of the collapse in the US housing market and the losses then suffered by 
the big banks and other financial institutions that had bought so much of 
the so-called sub-prime (risl<y) mortgages. But stock market investors 
thought that this would not affect their investments because it would not 
touch the nicely growing capitalist 'real' economy of making goods and 
delivering services. 

Of course, this was wishful thinking. After Christmas, one big bank after 
another announced yet more losses as they 'wrote down' the value of 
their debt securities they had bought on the expectation that house prices 
would keep on rising. To date, the banks and financial institutions have 
written off about $120bn. They may well have to admit to losses four 
times greater than that before they are finished, or 1% of world GDP. 

Then the evidence about the state of the US economy began to filter 
through to the minds of capitalist investors. Profits results from the big 
companies were down hugely, not just in the financial sector (20% of the 
US stock market), but also in other companies like Microsoft, the auto 



companies and other important services-based firms. US corporate prof- 
its looked to have fallen by about 5-10% in the last quarter of 2007. It will 
get worse in 2008. 

Also, the US economy is now slowing down fast towards what is called 
economic recession, when national output actually drops. The housing 
sector was in free fall, with prices dropping 5-10%, sales down 50% and 
mortgage defaults in the risky 'sub-prime' sector rising to 20%. But it was 
not just there. The Christmas sales for the big US retailers were appalling, 
with no growth at all over 2006. And other services are falling back. 

The credit and debt markets (mortgages, credit cards, auto finance) have 
seen large rises in the cost of borrowing, even though the US Federal 
Reserve Bank had started a series of interest-rate cuts. The Fed, the 
Bank of England and the European Central Bank have launched a coordi- 
nated injection of $500bn of credit into the world's financial system. But 
it is not working to turn the housing market around or stop the recession. 
So stock markets have panicked. 

And they are right to do so. As the US economy heads into recession, it 
will drag the rest of the world down with it. Already, the UK housing 
market is heading the same way as in the US. House prices have fallen 
for three consecutive months in Britain and will fall further, even though 
the Bank of England plans to cut interest rates. The UK consumer spent 
little over the Christmas period because most British households are al- 
ready highly indebted with big mortgages and credit card debts. 

UK manufacturing is in the doldrums because the pound has been way 
too strong, keeping export prices too high. That's happened because the 
UK trade deficit (even bigger than that of the US as a share of GDP), has 
been financed by attracting 'hot money' from Russians, Arabs and other 
oil-rich ruling classes (who buy homes, football clubs and British stocks). 
Thus the UK economy had staggered on, living off rising property prices 
and foreign borrowing. That is all coming to an end. 



Now stock markets have noticed that Europe and Japan will slow down 
too. Just three months ago, most capitalist economists said that Europe 
and Japan would grow at around 2.5-3.0% in 2008, with the UK and the 
US a little slower. China and India would rocket along at around 10% a 
year. Now they have changed their tune. Most expect a recession in the 
US and slower growth in Europe and Japan. They still hope for good 
growth in China and India. 

But it's going to get worse than that. With the UK and the US in reces- 
sion, expect Europe and Japan to grow no more than 1% this year. And 
China and India will slow too to about half their current growth rates. 
That's bad news across the board. 

It means higher unemployment (probably double current rates in the US 
and the UK) and smaller pay rises (possibly none at all), although the 
bonuses to the fat cats in the City of London and Wall Street won"t drop 
much. It will be particularly bad for those economies that are increasingly 
dependent on finance capital rather than productive sectors of manufac- 
turing and transport. 

The UK is the most dependent of all the big seven economies on finance, 
property and so-called professional services (legal, insurance, consultants). 
So this world downturn will hit it hardest of all. 



Capitalism beared 

Under capitalism if there is no profit, there is no production even if people 
need things or services. Therefore, over the last 25 years there has been 
a massive expansion of the unproductive sectors of the capitalist economy, 
i.e. a massive increase in fictitious capital. This is now expressing itself in 
what may be the worst crisis for more than 30 years. 

As I write, world stock markets are still reeling from yet another shock to 
the system brought on by the so-called credit crunch that has enveloped 
capitalist financial markets since last summer 

The latest shock was the biggest yet. Late on Sunday night, 16 March, the 
US Federal Reserve Bank announced that Bear Steams, America's fifth- 
largest investment bank, was bust. So it had agreed that JP Morgan-Chase, 
an even bigger bank, would take over Bear Stearns. JP Morgan was to 
pay just $2 a share and it would not be paying cash, but just offering JP 
Morgan shares to Bear Steams shareholders. At the same time, the huge 
loans and bonds of $30bn that Bear Steams had on its books would be 
guaranteed by a loan from the Federal Reserve to JP Morgan. 

In effect, JP Morgan was getting Bear Steams and its business for virtu- 
ally nothing. It was paying $256m (and not in cash) for a bank that had 
buildings alone worth $2bn and whose shares were worth over $100 each 
just a few months ago! And the risky loans that Bear Steams had, and 
which had forced it to the wall, were going to be guaranteed by the Fed. 
What a deal for JP Morgan! 

The US state authorities were doing this because they knew that Bear 
Stearns could not meet its obligations to other banks and creditors. It had 
mn out of cash and nobody in Wall Street, New York's financial centre, 
would lend to it. If it went bust, however, then all the other banks in Wall 
Street and in Europe too would incur huge losses on their loans and con- 
tracts to Bear Steams and perhaps force some of them into bankruptcy 



The Fed had to act in bailing out the great capitalist financial system. So it 
has taken on a considerable obligation to the rest of the banking system on 
behalf of the taxpayer — that's us. 

The Fed's action echoes what happened with Northern Rock in Britain. 
There a medium-sized mortgage lender that had pretensions to become a 
bigger bank went bust when it could not borrow enough money to pay 
interest or principal to the banks and investors who bought its mortgages. 

In this case, the Bank of England refused an offer from Lloyds Bank to 
buy Northern Rock for a pittance with guarantees on its loans, like the 
Fed did with JP Morgan to buy Bear Steams. Instead, it opted to try and 
save the bank by providing taxpayer funds directly. 

The Bank of England's plan did not work and it racked up huge obligations 
— nearly $100bn compared to $30bn the Fed just provided. Eventually, 
the government was forced to nationalise NR with the aim of sacking 
most of the workforce and selling off much of the mortgages to get our 
money back. 

Whatever the solution opted for by the state monetary authorities in the 
US or the UK, it shows that the credit crunch has reached such propor- 
tions that large banks are now going to the wall. No wonder former Fed 
Chairman Greenspan called the global financial crisis the worst since the 
1930s. The financial sector of capitalism is tottering. 

How did it get into this sorry state? The key to understanding the crisis is 
the changing relationship between the productive and unproductive sec- 
tors of capitalism. Capitalism is a system of production of things that peo- 
ple need for profit. Production is not for need, but for profit. If there is no 
profit, there is no production even if people need things or services. 

By that definition, the productive sectors of capitalism are those that gen- 
erate profit. Marx explained that only labour can generate value and profit 
arises when the value of goods or services sold on the market exceeds the 


cost of employing labour and investing in plant and raw materials to make 
goods or services. 

Some sectors of capitalism may seem to make a profit, but in reality are 
really just extracting or redistributing profits actually generated in other 
sectors of the economy. Thus, real estate companies can make a profit on 
buying and selling properties and on the fees they charge. But nothing has 
been produced in that process. Profits are also made when private build- 
ers build a house and sell it. But here something that people need is pro- 
duced. From the point of view of capitalism, the productive sector is house 
building but the unproductive sector is real estate, because that is where 
the profit that real estate agents make is originally generated. 

For capitalism, the productive sectors that generate profit are broadly 
manufacturing, mining, transport and communications. But these sectors 
must buy the services of lawyers, estate agents, advertisers and above all 
they must borrow from the banks and financial institutions to finance in- 
vestment and pay their employees. These sectors are necessary to lubri- 
cate the wheels of capitalism, but they are unproductive because they do 
not generate profits for the whole economy, but merely get a bite out of 
the revenues produced by the productive sectors. 

Just as 'necessary' and unproductive for capitalism are the government 
sectors of health, education, police and the armed forces. They are nec- 
essary to preserve the health and skills of the workforce and keep 'law 
and order'. But they do not generate surplus value or make a profit in 

What has happened over the last 25 years particularly has been a massive 
expansion of the unproductive sectors of the capitalist economy (at least 
in the mature advanced capitalist economies of North America, Western 
Europe and Japan). As capitalism has matured it has become increasingly 
less oriented to production. The shrinking productive sectors have had to 
finance an ever-growing unproductive sector or mature capitalist econo- 



mies have had to extract profits from the fast-rising productive sectors in 
China, India and Latin America. 

As a result, economic growth in the mature economies has slowed to a 
trickle compared to the golden decades of the 1950s and 1960s. Sure, 
economic growth has not been as convulsive and volatile as in the 1970s, 
but it has averaged no more than 3% a year in the advanced economies 
compare to 5-6% in the post-1948 period. 

That's because more and more investment has been diverted into unpro- 
ductive sectors that have given only the appearance of more profit. And 
worse, as profitability declined in productive sectors, the monetary au- 
thorities tried to boost growth by lowering interest rates and printing 
more money. Money capital grew, giving the appearance that there was 
plenty of capital or profit to reinvest. 

But as Marx would say, this was fictitious capital. It was not real because 
it was not based on profits made in the productive sectors of capitalism, 
but merely the result of the printing of paper money, or the making of 
contracts for bonds, mortgages and other financial instruments. In the last 
15 years, completely new and evermore exotic financial instruments were 
created to finance the buying of stocks and shares, buildings and homes 
and even some investment in real production. 

This fictitious capital reached astronomical levels. The world's annual output 
was worth about $53 trillion in 2007. However, bank loans reached $40 
trillion, the stock markets of the world reached $50tm, the bond and mort- 
gage markets reached $70tm and most astounding of all the derivative 
markets (contracts to buy or sell bonds, stocks or loans by a certain date) 
reached $500 trillion, or ten times world GDP! 

Clearly, world capitalism had become unreal. This could not last. The 
trigger was housing. This, after all, was one the biggest parts of fictitious 
capital. Cheap mortgages and a huge influx of money enabled even aver- 
age earners to get onto the housing market from about 15 years ago. 



Everywhere the housing market took off: rising prices bred even bigger 
mortgages and even higher prices. The appearance of prosperity led home- 
owners to borrow money and spend like there was no tomorrow. 

And the banks not only provided ever more mortgages to people who 
could not afford them; they also sold on those mortgages as bonds to other 
banks and investors greedy for the higher interest and prices that they 

Then about mid-2005 American house prices began to stop rising so fast 
and even started to fall. Prices had got so high that more and more people 
could not afford to buy, even with cheap and easy mortgages. The pro- 
ductive sectors of the economy were just not generating enough wage 
increases and profit rises to pay for high house prices. Just as the stock 
market bubble had burst in 2000, leading to economic recession in 2001, 
now it was the turn of the housing market bubble. 

House prices in the US have now slumped over 10%, with falls as big as 
30% in key states like California and Florida. People began to default on 
their mortgages. Banks that held them were forced to write off these 
debts. But many of these mortgages had been packaged off as bonds to 
others. Investors now found that their bonds were worthless. They had 
borrowed on the value of these bonds and now could not pay back their 
creditors. Soon the credit crunch was swinging right through the financial 
sectors of America, Europe and Asia. Eventually we have come to Bear 

When banks have to pay losses with their shareholders' money, they are 
forced to find more investors or they must cut back on lending. That's 
because they cannot lend more than say ten times the value of their inves- 
tor's capital or the deposits they hold. Most of the time, investors and 
depositors don't want their money all at once, so banks 'leverage' up, 
assuming that they only need to pay out on about 1 0% of their liabilities at 



If their capital disappears as they pay off losses and if depositors all de- 
mand their money back at once, they face bankruptcy. They must be 
careful and cut back on their lending or go bust like Bear Steams. They 
must deleverage. 

Banks and other financial institutions are now deleveraging like mad. They 
won't lend to home owners or manufacturers, or they will lend less and at 
higher interest rates. Fictitious capital is disappearing and the poor state of 
real capital is being revealed beneath a welter of worthless paper. 

This spells economic slump. Capitalist profitability goes up and down in 
cycles according to Marx"s law of the tendency of the rate of profit to 
decline. This is a tendency: profitability does not always decline. Indeed, 
in the US, the UK and Europe, it rose from 1982 to 1997. But now we are 
in the middle of the down phase in profitability that is likely to last until 

In the down phase, falling profitability can sometimes lead to an actual fall 
in the mass of profits generated by capitalism producing a bout of eco- 
nomic recession where production slows, unemployment rises and invest- 
ment falls until profitability is restored. 

This process is now happening. US corporate profits are now falling and 
soon European corporate profits will too. Then investment will slow or 
stop and unemployment, which has been falling in the US and Europe 
since 2002, will start to rise — and fast. 

The last economic recession was in 2001 and it was very mild because, 
although profits fell, the huge boost of fictitious capital into the housing 
market kept up consumer spending. Now we are entering an economic 
recession when housing markets everywhere are heading downwards and 
credit has dried up. This is going to be the worst economic downturn for 
capitalism since 1991 or 1981, maybe as bad as 1974-5. 



Black swans and econonnic recession 

British capitalism is in big trouble. The annual inflation rate has hit 3.3%, 
its highest level for 16 years. The governor of the Bank of England, 
Mervyn King, has been forced to send a letter to the Chancellor of Ex- 
chequer, Alastair Darling, to explain why the Bank has been unable to 
keep inflation from rising at more than 2%, which is the target set by the 
government for the Bank. 

In the letter. King explains that inflation has got completely out of control. 
Global fuel and food prices have rocketed. World agricultural prices have 
risen 60% in the last year; oil prices are up 80% and wholesale gas prices 
are up 160%! That has meant significant increases in living costs for 
average working family in the UK. For example, the average gas bill is up 
7%, electricity bill up 10%, the water bill up 6%; rail season tickets up 5% 
and, above all, the cost of an average tank of petrol or diesel to fill the car 
or lorry is up 20-35% in a year. Overall, the weekly shopping basket is up 
8%. Inflation is recorded at only over 3% because the cost of other items 
like clothing or electrical goods has fallen. 

And it is going to get worse. Mervyn King forecasts that the inflation rate 
will climb to over 4% a year and stay up there through most of 2009, at 
best. And the acceleration in inflation is happening at the same time as 
the UK economy is heading into slump as a result of the global credit 
crunch and the collapse of the housing market. 

Most economic forecasters are now admitting that British capitalism is 
grinding to a halt. The bosses union, the CBI, reckons that economic 
growth this year will be just 1.3% and next year not much better That 
would be the lowest rate of growth since 1992, the last great economic 

Even this forecast is probably optimistic. That's because a key factor 
driving British capitalism over the last decade or so has not been invest- 



ment in manufacturing and other productive sectors of the economy, but 
in real estate (housing) and unproductive speculation in stock and shares, 
bonds and money in the City of London. 

Now the credit crunch is causing huge losses in the financial sector and 
the UK housing market is collapsing like a pack of cards. House prices 
on most measures are falling by around 5-7% a year now and most fore- 
casts suggest that the total decline could reach 20-30% by end of 2009. 

So young people and others who joined the 'housing ladder' at its peak in 
summer 2007 will find that their property is worth only 70% of what they 
paid for it by then. And many will have taken out large mortgages to pay 
for their flat, many up to 100%. Their homes will be worth less than the 
debt they owe. That's what is called 'negative equity'. 

And with mortgage rates rising all the time, hundreds of thousands of 
British families are going to be unable to meet their payments over the 
next couple of years and will be forced to sell or have to walk away from 
their homes. 

So the great consumer spending binge is over Everybody will be tighten- 
ing their belts as wage rises fail to keep up with inflation and unemploy- 
ment rises. That's a recipe for outright slump, not just an economic 

Unemployment is already starting to rise. The number of claimants for 
unemployment benefit in May rose for the fourth consecutive month and 
the official unemployment rate rose for the first time in years to 5.3%. 

With unemployment heading above 6% and inflation towards 5%, the mis- 
ery index (the addition of the two rates) will be in double figures soon. 
And the last time that happened, British capitalism was reduced to its 



What can the Bank of England and the government do about this to avoid 
a slump? The short answer is nothing. Mervyn King is in a deep quan- 
dary. If he raises interest rates in order to drive down inflation, he will just 
make it worse for British businesses and households to fund their invest- 
ment and spending. That will deepen the oncoming recession. On the 
other hand, if he lowers interest rates, he could inspire more borrowing 
and more inflation. So he will do nothing. 

The truth is that the spectre of 'stagflation' is now hanging over the UK 
economy. That is where the economy stagnates and does not grow, but 
the economic slowdown does not get inflation down either Such a situa- 
tion has not existed since the 1970s and early 1980s and the strategists of 
capital are now really worried that it could reappear, proving yet again 
that capitalism cannot avoid the continual cycle of boom and slump, which 
is inherent in the mode of production for profit, not need. 

The supposed solution of the politicians (including New Labour ministers), 
the bankers and the bosses to this dilemma should be no surprise to Marx- 
ists. It is not that the bankers and financiers that got the economy into this 
mess should be penalised. Oh no. The answer is that workers and their 
families should take the hit. 

The cry of the politicians and economists is that workers must accept 
lower or no wage rises to stem inflation. Public sector workers are being 
forced to accept less than a 2% pay rise when inflation is now well above 
that and accelerating and employers in the private sector are trying to do 
the same. And yet we know that the reason for inflation is nothing to do 
with wage rises and that is admitted by the economists and the Bank of 
England. So the capitalist solution is blatant — working-class families 
must be forced to reduce their already low standards of living. 

The economic crisis is not the result of workers like the oil tanker drivers 
asking for too much (they had not had a pay rise since 1992). It is a 
product of the failure of capitalism globally. The housing slump is not 
confined to Britain, but started earlier in the US and has spread to Spain, 



Ireland, Australia and elsewhere. The financial crisis is not confined to 
Britain, but started in America and has spread to the UK, Europe and 
Asia. Nothing is clearer: capitalism is destroying people's hard-won living 
standards built up over the last decade or so and the leaders of capitalism 
want the working-class to pay for their losses. 

There is a theory doing the rounds of capitalist economists at the moment. 
It is called the Black Swan theory, developed by an American financial 
analyst, Nicholas Taleb. Before people discovered Australia, it was thought 
that all swans were white. But the discovery in the 1 8"' century that there 
were black swans in Australia dispelled that notion. 

Taleb argues that many events are like that. It is assumed that something 
just cannot happen: it is ruled out. But Taleb says, even though the chance 
is small, the unlikely can happen and when it does it will have a big impact. 
Taleb cited the 9/11 Twin Towers attack as a modem example. The 
global credit crunch and the ensuing economic crisis has been suggested 
as another example of the Black Swan theory. 

From a Marxist dialectical point of view, the Black Swan theory has some 
attraction. For example, revolution is a rare event in history. So rare that 
many (mainly apologists of the existing order) would rule it out as impos- 
sible. But it can and does happen, as we know. And its impact, when it 
does, is profound. In that sense, revolution is a Black Swan event. 

But where Marxists would disagree with Taleb is that he argues that chance 
is what rules history. Randomness without cause is not how to view the 
world. This is far too one-sided and undialectical. Sure, chance plays a 
role in history, but only in the context of necessity. 

The credit crunch and the current economic slump could have been trig- 
gered by some unpredictable event like the collapse of some financial 
institution last August or the loss of bets on bond markets by a 'rogue 
trader' in a French bank last December For that matter, the recent food 
price explosion may have started with a tsunami or an unexpected drought 



in Australia. And the oil price explosion may have been the product of the 
'arbitrary' decision of President Bush to attack Iraq. 

But those things happened because the laws of motion of capitalism were 
being played out towards a crisis. Capitalism only grows if profitability is 
rising. And corporate profitability peaked in 1997, fell back to 2002, re- 
covered somewhat up to 2005, but began falling again after that. With 
profitability declining, the huge expansion of credit (or what Marx called 
fictitious capital) could not be sustained because it was not bringing enough 
profit from the real economy. Eventually, the housing and financial sec- 
tors (the most unproductive parts of capitalist investment) stopped boom- 
ing and reversed. 

Similarly, the food price explosion was man-made, not an act of God. 
Global warming, droughts and floods are man-made. The food and en- 
ergy deficits are due to weak capitalist production combined with strong 
demand from China and other fast-growing economies and the failure of 
capitalism to diversify into clean alternative energy production. 

So the current economic crisis was no chance event that nobody could 
have predicted. Marxists and even some capitalist theorists forecast it. 
The economic slump that British capitalism is now entering (along with 
many other capitalist economies around the world) is no Black Swan. It is 
an inevitable consequence of the capitalist system of production. 



September 2008 CHAPTER THIRTY-TWO 

Credit crunch one year on 

One year after the beginning of the credit crunch, the earthquake in the 
global financial system has left banks, insurers, pension and municipal 
funds, hedge funds and private equity companies tottering and falling. 
Collateral damage has been immense and the after-shocks are still to 

On 6 August 2007, America's second-largest mortgage lender American 
Home Mortgage Investment Corp filed for bankruptcy. Three days later, 
France's biggest bank, BNP-Paribas announced that it was freezing 
redemptions on three of its investment funds in sub-prime mortgages. 
Immediately, the European Central Bank announced it was injecting E75bn 
into the financial system. Only a few days later, the US Federal Reserve 
Bank reacted with a 50 basis points cut in its funds rate and injected extra 
liquidity into the system. The credit crunch had begun! 

How did it come about? Well, the trigger (but not the gun) was the col- 
lapse of the US housing market and the debacle of the so-called sub- 
prime mortgage market. As in many countries of the Anglo-Saxon world 
(the US, the UK, Australasia, Ireland, Scandinavia, the Baltic states) and 
even parts of Europe (Spain, Hungary etc), there had been a massive 
boom in house prices, particularly after the mild economic recession in the 
OECD of 2001. House prices had never risen so much and so fast. 

Cheap credit irom the banks and mortgage lenders enabled home owners 
to borrow hugely on the back of their house values. At one point, accord- 
ing to the great guru of American finance himself, Alan Greenspan, Ameri- 
can home owners were taking $ltm each year out of the 'value' of the 
their homes to spend. This fuelled consumer spending and economic growth, 
as well as the stock market. 

But it was all based on a lie. No real values were being created. Indeed, 
US and British householders were saving nothing. Household savings rates 



had dropped from 13% of disposable income in the 1990s to negative in 
2005. The credit-fuelled economy was a huge bubble waiting to burst. 
And so it did. 

Eventually house prices got so high in the US that first-time buyers could 
no longer get on the ladder. They had been encouraged and cajoled to do 
so with sub-prime mortgages, in effect loans that required no deposits, no 
proof of income and no initial payments for the first six months etc. These 
loans were cynically sold to people (often on very low incomes in poor 
housing areas, mostly black and Hispanic) who very soon realized that 
they could not maintain the payments. Eventually, the housing bubble was 
pricked, beginning in 2006 and gathering pace to the collapse of summer 

It was then that the banks and other financial institutions realized they 
were in trouble. They had made these loans and had then packaged them 
up as bonds or securities to be sold and sold again around the world to all 
sorts. The risk of default on the mortgages was thus spread around or 
'diversified" . In reality, it just meant that when the housing bubble burst, it 
affected not just mortgage lenders but all sorts of investors, big and small. 

Take one. Irvine, California, was a planned community nestling between 
Los Angeles and San Diego. A year ago at this time, Irvine was home to 
18 sub-prime lenders, including many of the leaders in the field. New 
Century Financial. Irvine had become the center of the sub-prime indus- 
try almost by accident. As the business of writing mortgages to riskier 
borrowers grew rapidly in the middle of the decade, many top employees 
at the established sub-prime firms struck out on their own, setting up shop 

But the industry imploded even faster than it grew. New Century had 
become the second-largest sub-prime lender in the US. It filed for bank- 
ruptcy last April and essentially halted operations a month later. "Hon- 
estly, some people are still sitting here with their jaws dropping, saying 
'How did it happen?' It was just so fast," said Jacquie Ellis, CEO of the 



Irvine Chamber of Commerce. "Typically when you have a downturn, it's 
a slow decline. That's not what happened here." 

By the end of the year, almost 9,000 'subprime' jobs were gone from 
Orange County. Many of these people have been unable to find new jobs. 
And economic officials say that was only part of the economic pain. Sup- 
pliers and service firms from hotels and restaurants to printers and soft- 
ware developers that had come to depend on the lenders for a bulk of 
their business have had to cut staff as well. 

Ellis said one hotel in town has lost $lm in annual bookings as a result of 
the subprime collapse. And small businesses, such as local trophy shops 
that produced the monthly sales awards, have been hurt. "Everybody was 
riding high, it was like fat city," said Ellis. "All of a sudden you look around 
and think, 'Joe across the street lost his job,' or 'Oh, my gosh, Sally next 
door lost her job.'" 

The impact of this credit crunch was global. Narvik is a remote seaport 
where, along with three other Norwegian municipalities, it has lost about 
$64m in complex securities investments that went sour. 

The residents want to know how their close-knit community of 18,000 
could have mortgaged its future — built on the revenue from a hydroelec- 
tric plant on a nearby fjord — by dabbling in what many view as the black 
arts of investment bankers in distant places. 

In 2004, Narvik and the three other towns took out a large loan, using 
future energy revenue as collateral. They invested the money, through 
Terra Securities, which offered a better return than traditional investments 
— namely US sub-prime mortgages. In June 2007, as the sub-prime prob- 
lems were brewing, Narvik shifted some money into an even more com- 
plex investment, again through Terra Securities. 

Within weeks, as the sub-prime market deteriorated, this investment de- 
clined in value and Narvik got a letter from Terra Securities, demanding 



an additional payment of $2. 8m. The chief investigator of Norway's fi- 
nancial regulator, Eystein Kleven, said Terra Securities' Norwegian-lan- 
guage prospectus did not mention such payments, or other risk factors. 

Terra Group, which is in turn owned by 78 savings banks and remains in 
business, has rejected calls for it to compensate the towns. Norway's 
finance minister, Kristin Halvorsen, has ruled out a state bailout and 
Citigroup, which shut down one of the money-losing investments that 
Narvik bought, said it had no legal obligation. 

The investments represented a quarter of Narvik's annual budget of $ 163m 
and covering the losses would necessitate taking out a long-term loan, 
which the town could only pay off by cutting back on services. 

And it was not just the small town lenders and councils that took the hit. 
The great credit bubble burst eventually took down some of the giants of 
the global finance. In March, the US Federal Reserve was forced to res- 
cue the fifth-largest investment house in Wall Street, Bear Steams, when 
the securities firm faced bankruptcy and its failure could have led to a 
widespread financial collapse. As Ben Bernanke, the head of the Fed put 
it: "The adverse effects would not have been confined to the financial 
system but would have been felt broadly in the real economy through its 
effects on asset values and credit availability". 

The Fed agreed to give emergency funding to Bear Steams after a mn on 
the company wiped out its cash reserves in two days. During the week- 
end following the rescue. Fed officials helped arrange a takeover by JP 
Morgan at a fraction of Bear Steams's market value. 

All this was a far cry from the comments of Bernanke when the credit 
cmnch first broke last summer Then he said the bursting bubble would 
cost no more than $50bn and there would be just a few failures of some 
small regional banks invested in real estate. 



As we review the collateral damage now, the current score of bank losses 
globally (and still counting) is $500bn, ten times Bemanke's forecast. 
Moreover, up to 30 regional banks and mortgage lenders have gone bust 
in the US; and we know about Northern Rock in the UK (bailed out by 
£30bn of taxpayers money); as well as the 'rogue trader' scandal of $6bn 
in France's Societe Generale — and we could go on. 

Indeed, any reasonable estimate of the total financial damage globally 
puts the figure at over $ltm (the IMF) or even $2trn. That's compared to 
world GDP of about $60tm, or 3% of world GDP. That is how much 
global growth is likely to lose over the next year. Given that global eco- 
nomic growth, including fast-growing India and China, is about 5%, that 
would take world growth below the 2.5% that the IMF reckons is needed 
to sustain employment and incomes on average in the world. And in the 
more advanced capitalist countries of the US, Europe and Japan, eco- 
nomic growth is likely to be below 1% or even negative in the next year. 

Figures for the economy in the last few weeks suggest that now all of the 
G7 economies (the group of the major advanced economies including US, 
UK, Japan, Germany, France, Italy and Canada) are already in a reces- 
sion or close to tipping into one. Other advanced economies or emerging 
markets (the rest of the Eurozone; New Zealand, Iceland, Estonia, Latvia 
and some South-East European economies) are also on the tip of a 
recessionary hard landing. 

And once this group of 20-plus economies enters into a recession, there 
will be a sharp growth slowdown in the BRICs (Brazil, Russia, India and 
China) and other emerging market economies. For example, a country 
like China — that even with a growth rate of 10%-plus has officially 
thousands of riots and protests a year — needs to move 15m poor rural 
farmers to the modem urban industrial sector with higher wages every 
year just to maintain the legitimacy of its regime. So for China a growth 
rate of 6% would be equivalent to a recession. It now looks like that, by 
the end of this year or early 2009, it will have that. 



The housing collapse and the sub-prime mortgage debacle was the trigger 
for the credit crunch. But it was not the gun. The gun was the anarchic 
and crisis-ridden nature of the capitalist system of production. The bullet 
was declining profitability. 

Capitalism, contrary to the views of the dumbest of capitalist apologists 
(usually the heads of government like George Bush or Gordon Brown; or 
the heads of the central banks and finance houses), does not grow in a 
straight line upwards. The very nature of production for private profit with 
companies, individuals and investors competing and gambling against each 
other leads to excessive and blind investment and expansion. The result is 
a massive waste of resources and damage to people's lives. 

Credit bubbles and subsequent crunches are not new. Indeed, they hap- 
pen whenever the productive sectors of capitalism start to experience 
slowdown, namely profitability (the rate of profit) begins to fall. Then 
capitalists and financiers try to compensate by investing more into areas 
that are less productive, but provide better returns for a while (real estate, 
stock markets, fine art, gold etc). 

What is different about this credit crunch is that it involved new ways of 
expanding credit beyond the productive capacity of capitalism. Traditional 
bank lending gave way to loans that were converted into weird and won- 
derful new forms of bonds and securities that were sold onto all and sun- 
dry as 'safe and profitable" investments. And bets and hedges called de- 
rivatives were also sold and bought on top of them. The global credit 
market (including loans, bonds and derivatives) expanded from three times 
world GDP to 12 times in just ten years. 

So this credit bubble (the expansion of fictitious capital, as Marx called it) 
is different because it was huge and it was global. The collateral damage 
on its bursting will be the same: huge and global. 

As the credit boom exploded, profitability of the productive sectors began 
to decline, particularly after 2005' . The credit bubble expanded even 



more in response. But just like a yo yo, credit growth reached its limit and 
has now jumped back with a vengeance. 

The credit contraction is now experienced every day by people trying to 
get a mortgage for a house; borrow money to invest in new equipment or 
expand a business; or just to make ends meet. The banks won't lend or if 
they do it is at exorbitant rates. With the banks squeezing credit, house- 
holds must save, not spend; and businesses must contract, not expand. 

The credit crunch one year later means global economic recession one 
year (or more) onwards. That means housing repossessions, business 
bankruptcies, rising unemployment, falling real incomes and more loss of 
productive capacity. This is the bleak reality of the capitalist system of 

Sure, now all the talk in the councils of government and high finance is 
that they have learnt the lessons of the crunch and they will 'regulate' and 
'monitor' to ensure that it does not happen again. It won't — in the same 
way. But as sure as the night is black, if capitalism continues as the sys- 
tem of human organisation, there will be more crunches and economic 
crises, even if the apologists' lies and excuses take a different form. 

This latest global economic recession will be one of the most severe; 
perhaps matching that of 1980-2. Eventually, global capitalism will re- 
cover, say from 2010 onwards. But this recession won't be the last before 
2020. There will be another, perhaps even worse, before the next decade 
is out. 

1. See Chapter 24. 




Financial nneltdown 

Financial markets in Wall Street, New York, the City of London and all 
over are in turmoil. In just 24 hours, two out of the four largest investment 
banks in the US have disappeared. All this confirms what Marxists have 
always maintained: capitalism does not operate in a smooth and steadily 
increasing way to progress. It operates violently, lopsidedly, in cycles of 
boom and slump. Now more banks are set to fail and there will be more 
misery in the financial markets. Working people are also set to suffer as 
massive job losses are announced. 

As I write, financial markets in Wall Street, New York, the City of London 
and all over are in turmoil. Lehman Brothers, around for 158 years, has 
declared bankruptcy and 25,000 employees around the globe have lost 
their jobs. Merrill Lynch, the world's largest investment bank, has been 
taken over by the largest high street bank in America, Bank America. 

Bank America was virtually ordered by the US financial authorities to 
take over Merrill Lynch, paying $50bn. Otherwise, that bank too would 
have gone bust, putting thousands more out of work. Even worse for 
capitalism, it would have meant that both Lehman and Merrill Lynch would 
have defaulted on their contracts and obligations and thus brought down 
many other banks (15 were rumoured to be in trouble). Along with Bear 
Stearns (wiped out last March), three out of the top five investment banks 
in the US have now vanished in a puff of financial smoke. And finally, the 
world's largest insurance company, AIG, announced that it needed to raise 
$40bn within hours if it was not to default on its obligations and appealed 
to the Federal Reserve for a loan before it was too late! 

All this took place only one week after the world's largest semi-govern- 
ment mortgage lenders Fannie Mae and Freddie Mac had to be national- 
ised to protect American homeowners and the mortgage industry from 
going bust. These two lenders had over 40% of all mortgages in the US 
and 85% of recent new mortgages. It would have meant the total collapse 



of the housing market if they could not do business. So the Bush adminis- 
tration was forced to nationalise them! 

How did this terrible mess for capitalism come about? 

The capitalist economists have no real idea. Some say it is the fault of 
greedy chief executives of the banks who have gone into reckless invest- 
ments and lent too much money to people who could not pay it back. 
Some say it is the fault of the Federal Reserve and other central banks for 
keeping interest rates too low and thus encouraging too many people to 
borrow too much or too many banks to lend too much. Others say it was 
the failure of the central banks to 'regulate' the banks and investment 
houses to make sure they had enough funds to do their business instead of 
borrowing to lend etc. 

But perhaps the story of the British travel agent XL, which also collapsed 
this week, leaving hundreds without jobs and tens of thousands unable to 
get home from their holidays, has the most interesting clues to why this 
global financial tsunami is sweeping away so many big financial institu- 

XL chief executive explained tearfully to the press that his company had 
gone under without warning for two reasons: the sharp rise in the price of 
oil had dramatically increased the company's costs for air fuel; but when 
he tried to raise more finance to cover this, he was unable to get any 
banks to provide funding at rates or terms that made it viable to continue. 
And there we have it. Such is the stranglehold and fear in the global credit 
crunch that banks are no longer willing to lend money at reasonable rates 
or on reasonable conditions to businesses. And those that are hard pressed 
are forced into bankruptcy — expect much more of this over the next 

Why are the banks unable to lend? It's because they have lost so much 
money on the writing down of the assets they bought over the last five or 
six years. Now they must retrench and stop lending. Now they must find 



new capital and investors before they can start relending. In the mean- 
time, they are too scared or unwilhng to lend, even to other banks (that's 
why Bear Steams, Lehman, Northern Rock and others went bust — no- 
body would lend to them). 

What are these assets that have lost so much value? In the main, they are 
called mortgage-backed securities. In the old days of the housing market, 
banks or building societies would attract cash deposits from savers like 
you and me (we should be so lucky!) and then use these deposits to lend 
to people who wanted to buy a home. From deposit to mortgage — sim- 

However, some bankers started to be more 'innovative' in order to make 
more profits. They started to borrow funds from other banks and then 
lend that on as mortgages. This 'wholesale funding' became particularly 
popular with US and UK banks, like Northern Rock, which had been a 
rather sleepy building society until the mid-1990s when it converted into a 
'bank' with shareholders and an aggressive management out to make 
money for its investors (not savers). 

But that was not the end of it. Many banks came up with another wheeze. 
They would take their mortgages and batch them up into a basket of 
different quality mortgages which they would sell off as a bond or security 
to other banks or financial investors. By creating these securities and 
selling them off, they 'diversified' their risk to others. Also they set up 
separate companies that took all these liabilities completely off their books. 

That meant they could go out and borrow more and do more mortgage 
business. Soon many banks that used to have enough cash and stocks to 
match at least 10% of the loans, now had reduced that to just 5%, or in the 
case of the big American banks and mortgage lenders to just 2%. Lever- 
age (borrowing) was now 50 times the money the banks actually had to 
meet any losses. 



But no problem — the US housing market was racing upwards. So as fast 
as banks lent money, they made it back in the rising house prices. Home 
owners could afford to pay them back and take out even bigger loans. 
Banks could lend to people who hardly had any income because they 
could count on the value of the home rising to cover their loan. 

But then it all went horribly wrong. From about 2006, house price rises 
began to slow and then began to fall. Once house prices headed down- 
wards, so did the ability of mortgage borrowers to pay back their loans 
and their willingness to take out bigger and better mortgages. The mort- 
gage market slumped. Soon the mortgage lenders were losing money and 
behind them, the owners of all these mortgage-backed securities found 
that their 'assets' were not worth what they paid for them. And just eve- 
rybody and his dog in the financial world had these securities. The risk 
had been diversified so that everybody got hit when things went wrong. 

Why did the housing market go down? Why did it not carry on in a straight 
line upwards and it had done for nearly 18 years? I venture an answer. 
First, there are cycles of motion that operate under modem capitalism. 
The most important law of motion under capitalism is profitability. As Marx 
showed, the rate of profit is key to investment and growth in a capitalist 
system: no profit, no investment and no income and jobs. But profitability 
moves in cycles: for a period, profitability will rise, but then it will start to 

But the profit cycle is not the only cycle of motion under capitalism. There 
is also a cycle in real estate prices and construction. The real estate cycle 
seems to last about 1 8 years from trough to trough. 

There appears to be a cycle of about 1 8 years based on the movement of 
real estate prices. The American economist Simon Kuznets discovered 
the existence of this cycle back in the 1930s. We can measure the cycle in 
the US by looking at house prices. The first peak after 1945 was in 195 1. 
The prices fell back to a trough in 1958. Prices then rose to a new peak in 
1969 before slumping back to another trough in 1971. The next peak was 



in 1979-80 and the next trough was in 1991. The spacing between peak to 
peak to trough to trough varies considerably. It can be as little as 1 1 years 
or as much as 26 years. But if you go far enough back (into the 19th 
century), the average seems to be about 18 years. 

The last peak in US real estate prices was in 1988. Assuming an average 
cycle of 18 years, then house prices should have peaked in 2006. The last 
trough was in 1991. Assuming an 18-year cycle, then the next trough in 
US house prices should be around 2009-10. 

The real estate cycle does not operate in line with the Marxist profit cy- 
cle. The latter is a product of the laws of motion of capitahst accumula- 
tion. It operates in the productive sector of the economy, namely contrib- 
uting to the production of value. 

In contrast, the real estate cycle operates in the unproductive sector of 
the capitalist economy. New value created and surplus-value appropri- 
ated in the productive sectors of the capitalist economy are siphoned off 
by the unproductive sectors as the owners of capital spend their profits 
and workers spend their wages. Housing is a big user of consumer in- 
come. So the cycle in house prices reflects the spending behaviour of 
capitalists and workers, not the profitability of capital. 

For these reasons, the real estate cycle has different timings in its turns 
than the profit cycle. The profit cycle reached a trough in 1982 before 
rising for 15-16 years to peak in 1997. In contrast, the US real estate 
cycle troughed some nine years later in 1991 and only reached its peak in 
2006-7. The next trough is due no earlier than 2009-10. 

This huge rise in house prices, exhibited around many parts of the world 
as well as the US, represented a massive diversion of resources by capi- 
talism into unproductive sectors that produced no new profit through in- 
vestment in technology and productive labour. As a result, it actually re- 
duced the ability of capitalism to invest in new technology to boost eco- 
nomic growth. It was entirely a process of creating fictitious capital. 



That is shown buy one stark fact. You can measure the movement of 
house prices from 1991 to 2006. In 1991, the US house price index stood 
at 100; by 2006, it had reached 200, a doubling in price. But the costs of 
building a house including land purchase had not risen at all. So house 
prices were way out of line with the real production value of a home. The 
housing market had become a huge financial speculation. When home 
prices got so far out of line with the incomes of those who were buying 
them, the market finally toppled over. 

Capitalism does not operate in a smooth and steadily increasing way to 
progress. It operates violently, lopsidedly, in cycles of boom and slump. 
The path of chaos and anarchy applies to the cycle of profit and also to 
the cycle of housing construction. 

So what now? Well, more banks are set to fail. There will be more misery 
in the financial markets. More to the point for working people not worried 
about whether rich investors lose money, jobs throughout the financial 
services industry are going to go. And we are not talking about the fat cats 
at the top who caused this mess — they will leave with their payoffs and 
pensions intact. We are talking about the tens of thousands on moderate 
pay packets who put all their savings into the shares of the banks they 
worked in, and which are now worthless. 

And more, the collapse of the financial sector will lead to a serious eco- 
nomic downturn. It is already underway with the US, the UK, Europe and 
Japan going into economic slump, where output will stop increasing, com- 
panies will fail and unemployment and inflation will rise sharply. 

The politicians are lost in all this. Whether it is a right-wing Republican 
administration or New Labour, they know not what to do. Indeed, in many 
ways New Labour has been so tied to the model of American capitahsm 
with its 'free choice' and 'open deregulated markets' that it is even more 
in denial than the Republicans. In America, they have nationalised the 
mortgage lenders. In Britain, they just look shocked and babble about the 
'worst crisis in 60 years'. 



Eventually, capitalism will recover, unless governments come to power 
mandated to end the rule of capital. But it will recover only by restoring 
profitability. To do that, many jobs must go and many companies must be 
swallowed up by richer ones. That process has started in the financial 
sector. It will continue across the whole economy. 




Socialism for the rich, capitalism 
for the poor 

After a week of turmoil on financial markets, on Saturday 20 September, 
President Bush said he was proposing to spend $700bn of taxpayers" money 
to buy the rotten mortgage assets held by the banks on Wall Street. He 
said he was doing this to help the average American family with their 
homes and jobs. 

At the same time Gordon Brown, at the annual Labour party conference 
in Blackpool, England, was telling delegates the same thing to explain why 
he intervened personally to ensure the Lloyds Bank bought Britain's big- 
gest mortgage lender, HBOS last week. 

Both were lying. They were not taking these actions to help working peo- 
ple. They did it to save finance capital from disaster. 

The Bush-Paulson plan to buy to rotten mortgages, along with the nation- 
alisation of the two biggest mortgage lenders only ten days ago, will mean 
that the US government will soon own the vast majority of Americans' 
mortgages. It will mean a large part of American household debt in the 
hands of the state. Overall, it is the biggest nationalisation in world history, 
equivalent to $6trn, or 45% of annual US output. 

But, of course, the devil is in the detail of the terms. This is not expropri- 
ating the banks. On the contrary it is saving them — with nearly full 
compensation, so they can resume their operations and restore their prof- 

In turn, US government debt will rise 40% of GDP to nearly 1 00%! And 
what will the taxpayer get for this huge bailout? Just a load of defaulted 
and non-paying mortgages, along with higher taxes, cuts in public spend- 
ing on health, education and social security. 



And behind those bad debts lie a trail of misery for millions of Americans 
who will lose their homes and eventually their jobs. Nothing much will be 
done for them. It won't stop the unfolding slump in world capitalism that 
we are entering with rising unemployment, falling real incomes and de- 
clining public services. 

Instead most of the money will go to help the fat cats of Wall Street get 
out of their mess. You see, when it comes down to the impending collapse 
of capitalism, suddenly socialism is a good idea. It's just this is socialism 
for the rich, while the rest of us have to continue to live under capitalism. 



A kick in the face for capital 

Such was the indignation of ordinary Americans that yesterday the much 
trumpeted $700 billion bailout was voted down in Congress, sending 
Shockwaves around the world's financial institutions. Whatever they do 
now, a new package or no package will mean serious economic downturn 
and reveal the real nature of capitalism to all. 

What a kick in the face for America's capitalist elite! The US House of 
Representatives voted to reject the Emergency Economic Stabilisation 
Act put forward by Treasury Secretary Hank Paulson, Fed Chairman 
Ben Bemanlce, President Bush, Vice-President Cheney, the majority Demo- 
crat leader of the House, the Republican minority leader of the House, 
both candidates in the upcoming presidential election, Barack Obama and 
John McCain and all the American media. 

Hank Paulson wanted to take $700bn of taxpayers' money, equivalent to 
6% of America's annual output, and not spend it on new hospitals. Medi- 
care, more schools and better education; No, not on that. Paulson wanted 
to spend it buying up the bad and rotten debts of the big banks and finan- 
cial institutions so they could start making profits again. 

But the American electorate was not having it. Congress members were 
deluged with emails, letters and phone calls from constituents demanding 
that this legislation be thrown out. It did not matter that the 'great and the 
good' were saying this payout, equivalent to the entire cost of the Iraq 
war, would have 'safeguards for taxpayers'. They knew it was just a 
bailout for the rich at the expense of the majority of working people. 

The fat cats of Wall Street were led by the Treasury Secretary Hank 
Paulson, the former head of Goldman Sachs, the most powerful invest- 
ment bank in the world. Paulson used to get $40-5 Om a year in salary and 
bonuses. He wanted to save his former bank and all the others. 



Paulson represents just 1% of the population, those 450 billionaires in 
America and 3m millionaires who between them own 25% of all Ameri- 
ca's wealth. The credit crunch was losing them money big time. He aimed 
to get taxpayers' money to bail them out. 

Fear and terror were proposed to the people if this law was not passed. 
The world would come to an end, he said. Well, not enough Congressmen 
and women, even though many took money from finance capital, would 

A majority of Republicans, driven partly by an extreme ideology against 
so-called "government interference in markets", and partly by pressure 
from the electorate that can vote them out of office in just five weeks 
time, rebelled against their leaders. Also, many Democrats backed the 
views of their constituents against their sycophantic leaders. The vote to 
bail out the rich was lost. 

What happens now? Well, the rich elite will make strenuous efforts now 
to reverse this decision. There are two possibilities for capitalism. The 
first is that the vote stays lost. Then more banks will fail (three big ones 
failed on the same day that Congress voted) and the stock market will fall 
further (it was down by the biggest amount since 9/11). America would be 
staring depression in the face, equivalent to the 1930s. 

Paulson is right: failure to bail out his friends will mean a strike of finance 
capital; another squeeze of credit and then companies will stop producing, 
profits will fall (they are already falling at over 10% ayear now) and jobs 
will be lost, as the housing market dives further. 

The second is that the vote eventually goes through. That will mean mas- 
sive government spending to bail out the banlcs and huge printing of money 
to help the fat cats. That will mean inflation alongside stagnation of the 
economy in America, Britain and Europe. 



So the alternatives are depression worldwide or stagflation worldwide. 
We are beginning to see the reality of capitalism in crisis. 




Credit crunch — who pays? 

Britain's second-largest bank, the Royal Bank of Scotland, which owns 
Nat West and has recently bought Holland's largest bank ABN-Amro, has 
announced that it lost £4bn in the last three months as a result of the 
world's great credit crunch. 

RBS says that it must write off £5bn in loans and debt securities that it 
had on its books as worthless. And it now must ask existing shareholders 
to stump up more money — as much as £10bn — to buy new shares in 
the bank so it does not go bust. 

And this is happening just a few weeks after the head of the bank. Sir 
Fred Goodwin, had declared a whopping great profit for the bank and 
made it clear to all and sundry that the credit crunch would not affect 
RBS and it had no need for extra funds. 

This news shows that the credit crunch is going to hit Britain in a big way. 
Up to now, Britain's main high street banks had not seemed to have suf- 
fered much — they were all announcing big profits and there was little 
talk of large 'writedowns' of worthless assets. 

The collapse and subsequent bailout by the taxpayer of Northern Rock 
was an exceptional event due to the 'bad policies' of one set of managers. 

At the same time, the government of Darling and Brown, the leaders of 
industry and the City of London were arguing that the British economy 
was still growing well and while the financial sector was on a 'sticky 
wicket' due the housing and mortgage crisis in the US, Britain was "well- 
placed" to avoid the worst. 

Well, that story now looks shot full of holes. RBS is not a small mortgage 
lender from the north-east like Northern Rock that got too big for its boots. 



It is a major international bank with interests in Europe, Ireland and the 
US. But when you delve into its accounts, you find that all was not well. 

The bank is one of the weakest in Europe. Relative to all its loans and 
debt securities that were made or purchased, it had the least amount of 
shareholder investment. Indeed, it had safe funds worth only 4% of all 
the loans and assets on its books — the barest minimum allowed under 
international banking regulations. And, more than anyone else, it had bought 
those 'toxic' mortgage securities from American banks that were backed 
by the value of American homes. So much of its assets and its profits 
were based on the now falling value of American houses. 

At the same time, it had just bought another huge bank, ABN-Amro, after 
a bitter merger fight fora huge amount of money at the top of the market 
just before the share prices of all the banks plummeted in the credit crunch. 
And RBS, like all the other British banks, was now facing up to a housing 
market slump in the UK in 2008 that the US had seen in 2007. 

And boy — is that housing slump coming. After peaking last summer, UK 
house prices had been slowly sliding downwards. Now the pace of de- 
cline is accelerating. Most expert analyses have come round to the view 
that house prices will fall a minimum of 10% from their peak last summer 
— it is more likely to be 1 5%-plus before the market bottoms some time in 
2009-10. So a house worth £250,000 last summer will be lucky to be 
worth £200,000 before the end. 

And here is the problem. Over 50% of mortgages issued by the likes of 
RBS and Northern Rock in the last few years have been for over 80% of 
the value of the property. And that does not include all those mortgages 
made to people just trying to make money from renting out flats (buy -to- 
let, as it is called). 



So if house prices drop 15%, many homeowners are going be under water 
in what is called 'negative equity', where their house is worth less than 
the mortgage loan they have on it. If these homeowners walk away or 
default on their payments, the banks are going to take substantial losses. 

And it is not just British homes. Many companies that bought their offices 
on loans from the banks will also be under water and there will losses on 
commercial mortgages too. 

It is often argued that a housing slump won't have such a big impact as it 
has in the US because British banks did not go in for reckless lending to 
people who could not afford to pay it back as they did in America — the 
so-called sub-prime market. 

Well, the figures don't agree. IMF and OECD researchers reckoned that 
the UK's level of mortgage debt to household income and level of house 
prices to income are so high that UK housing is more overvalued than 
any other in the advanced capitalist world — British houses are facing 
price subsidence. 

A recent survey by a credit agency found that sub-prime borrowers who 
had taken out mortgages on dubious income statements were ten times 
more likely to default and there were plenty of places all over the UK of 
towns where people desperate to get onto the housing ladder now faced 
default. Places where sub-prime mortgages were more than 10% of 
homes included Manchester, Cardiff and Wolverhampton. While in Lon- 
don, more than 25% of all homes with mortgages were buy -to-let loans, 
facing 'negative equity'. 

A huge tsunami of unpaid debt is about to hit British capitalism. What the 
RBS announcement shows is Britain's bankers are finally recognising that 
the tide is coming in fast and they are battening down the hatches. 



It is unlikely that any big bank will go bust — first, they will raise more 
money from their shareholders to finance their past bad decisions; and 
second, the Bank of England (and that means us the taxpayers) will bail 
them out if necessary. 

The Banlc of England, having put its head in the sand for months and 
months, is now waking up to the disaster. It has finally started to cut 
interest rates (although it remains worried by a rise in inflation that it 
cannot seem to control). 

But more — it has decided, on our behalf as taxpayers, to start buying or 
swapping the bad loans and debt held by the likes of RBS for UK govern- 
ment bonds. So the banks get nice safe bonds for their rotten mortgages 
to put on their books and they no longer have a problem. The problem 
becomes one for the government. 

Brown and Darling, after much kicking and screaming, finally took over 
Northern Rock and had to recognise £50bn of loans to the bank that are 
now the liability of the state. This new Bank of England measure will put 
even more liabilities on the government books. But it had to be done or 
there would be a major banking crisis in 2008. 

Thus capitalism works its mysterious ways: the capitalists don't want any 
'interference' from the state and democratic accountability when they 
are making huge profits; but when things go pear-shaped, they demand 
funds from the state but with no recourse and no control. 

Who will suffer from the coming UK housing slump? Well, first it will be 
the workers in the financial sector, the City of London. It is estimated that 
about 40,000 will lose their jobs for a start. 

On the whole, these won't be the fat cats on the boards of directors of the 
big financial institutions like Sir Fred Goodwin (they are always 'knights 



of the realm'). No, if they get the push it will be with a 'golden hand- 
shake' of millions and their pensions intact^ The head of Northern Rock 
took nearly a million and a pension for presiding over a strategy that brought 
it to its knees. 

Yet thousands of Northern Rock employees are losing their jobs with no 
handshakes, pensions or prospects of future work. The job cuts in the 
City of London will be aimed at those in the back rooms. They may be 
earning £30-50,000 a year — not bad by most people's standards, but not 

The government reckons UK economic growth will be about 2-2.5% this 
year well down from 3.25% last year. But that is now regarded as very 
optimistic. The IMF, basing itself on the global credit crunch and housing 
collapse in the UK, reckons growth will be closer to 1.5% for the next two 
years. It is likely to be worse than that. 

But all these forecasts lead to one thing — everybody, not just City work- 
ers, are going to suffer. The UK is more dependent on the financial 
sector in its economy that any other major capitalist country (unless you 
count Switzerland as major). Job losses and rising unemployment will be 
the order of the day. 

The government has announced another fall in the jobless figures. Of 
course, this is mainly a statistical trick. Those who claim jobseekers al- 
lowance are under 800,000. Even in booming Britain, they cannot get a 
job because they are so undereducated or unskilled that there are not 
enough low-skilled jobs available for them (there are only 700,000 'no 
skills' vacancies at the last count). 

This is not a true reflection of the real level of unemployment in Britain. 
Indeed, the total number of people in work has hardly changed in the last 



30 years despite an increase in population and in people of working age. 
There are millions who are in 'fulltime' education where they are hope- 
fully getting qualifications that will get them work. Also, there have been 
millions of women that have come into semi-skilled work over the last few 
decades while millions of older unskilled men have just gone. 

Where have they gone? Well, the Tory myth is that they have all signed 
on for 'incapacity benefit' claiming that they are ill or disabled and cannot 
work. This benefit is not means tested and worth more. This myth that 
there are 2.6m loafers and shysters not willing to work has been accepted 
by New Labour and they are cracking down. 

Interestingly, the 8% of the UK's working population on this benefit is not 
much higher than the 6% in the US where the rules are supposed to be 

And when the government did a survey of people on incapacity benefit, 
they found that half a million were suffering from depression or had clini- 
cal mental illness. 

Only a small minority had alcoholism or drug abuse. Moreover, only about 
0.5% were faking. Sure, many of these millions were capable of doing 
some work, but most lacked skills, half were over 50 years, or they had 
sick family members to look after, or needed transport to get to jobs. 

The reality is that if you added to the 750,000 claiming job seekers allow- 
ance another 1 .5m claiming disability allowance who could work but can- 
not get a job, then Britain's unemployment rate is not 5% but probably 
double that already. And the hard times are still to come. 

1. The head of the Royal Bank of Scotland, Sir Fred Goodwin was 
at the helm of a bank that lost £24bn, the biggest loss in UK corpo- 



rate history. He subsequently resigned as chief executive and left 
with £20m compensation and a pension worth £700,000 a year 
Despite demands from the government to return that compensation, 
he refused. RBS has subsequently sacked thousands of employees, 
but not on similar terms. 




All Keyneslans now? 

January 2009 

There have been dozens of books on the global credit crunch. There was 
one by Charles Morris, banker and lawyer, which came out last March 
(The trillion dollar meltdown). Then there were more recent books by 
top American economists, Robert Shiller and Mark Zandi that were pub- 
lished this summer {The sub-prime solution; how today's global finan- 
cial crisis happened: and Financial shock). 

And then there is the book by one of the most notorious of financial specu- 
lators, George Soros, infamous for making billions of dollars on predicting 
(or forcing) the collapse of the British pound in 1992 {The new paradigm 
for financial markets; the credit crisis of 2008 and what it means). 
Soros has now become a 'socialist', attacking the Iraq war, 'free market 
economics' and inequalities of wealth and income. This new volume again 
attacks the excesses of modern capitalism! 

Even earlier than all these, two City of London economists, David Roche 
and Bob McKee published a slim volume, back in September 2007, that 
exposed the Ponzi-style expansion of fictitious capital built up over the last 
ten years and predicted its collapse {New monetarism). 

But now, British economist, Graham Turner has published a book {The 
credit crunch). Turner is an independent consultant who worked in the 
City of London for many years. What singles out this book is that it claims 
to approach the problem from a socialist perspective, or at least it has 
been adopted by the left. Turner has spoken at many left forums in recent 

What is Graham Turner's message? He outlines his aim in the preface: 
"the roots of this crisis must be understood to ensure there is no repeat of 
the flawed economic policies that have created the biggest credit bust 



since the 1930s. If we understand the causes, the damage can be miti- 

And what does Turner think are the causes? Is it due to the anarchy of 
capitalism, the laws of motion of capitalism that include the tendency of 
the rate of profit to fall; or the huge expansion of fictitious capital designed 
to avoid a slump? 

Well no. Apparently the reason for the credit crunch is the growth of free 
trade that led capitalist companies to move their production to cheaper 
labour areas. This forced central banks in the west to keep interest rates 
low in order to keep up demand and spending. Debt rose to excessive 
levels as a result. 

Turner says he is not against free trade. For him "it is a good thing, but not 
when it is used by companies simply as a ruse to cut costs". But is that 
not just one of the inevitable consequences of free trade (trade without 
tariffs and quotas on the movement of goods) under capitalism? How 
can you have free trade under capitalism that is not damaging to working 
people's jobs? 

What should we do to avoid future crises? "Governments will have to 
realign their policy away from the exclusive promotion of big business that 
lies at the heart of recent credit bubbles". So governments must not 'ex- 
clusively' promote big business — in other words, we need more of a 

Turner argues that we need a new economic agenda that "balances the 
interests of companies and workers more evenly and promotes a free 
trade that does not fuel the boom and bust seen today". So there we have 
it: we need a capitalism that is fairer and more even so that free trade 
does not cause slumps. 

Turner expresses a naivety about the nature of capitalism that is disap- 
pointing. It is in the nature of capitalism to generate inequality and injus- 



tice in seeking profit and it is in the nature of capitalism to deliver periodic 
economic slumps as it grows. There can be no 'good and fair capitalism', 
and, for that matter. Turner does not explain how we could get it in this 

Having said all this, this book does provide many insights into how this 
credit crisis developed and how it has unfolded. In particular, the chapter 
on the impact of the credit bubble and burst on emerging economies is 
revealing. He also very clear and correct in his condemnation of the 
spurious arguments of Ben Bernanke, the head of the US Federal central 
bank that the crisis was a problem of 'excessive saving' by mercantilist 
Asian economies and not more the result of excessive spending in the 
West on housing financed by a credit bubble. And there are many inter- 
esting points about why and how Japan got into permanent depression in 
the 1990s. 

But here lies another theoretical flaw in Turner's reasoning and thus in his 
prescriptions to solving the crisis. Graham Turner is clearly a Keynesian 
through and through^ At the end of nearly every chapter, he refers to 
John Maynard Keynes as providing the theoretical explanation for the 
mess and also providing the policy measures for the way out. 

Turner argues that the credit crunch led to debt deflation. By that he 
means that people, banks and corporations could not pay their debts and 
the value of debt therefore plummeted. This led to a vicious circle in 
which investors would no longer invest and preferred to hold their capital 
in cash. Thus money capital was trapped and credit became scarce and 
unavailable for investment. 

Keynes called this the liquidity trap. Keynes argued that this was a cause 
of the Great Depression of the 1930s. What needed to be done was for 
central banks to cut interest rates to the bone. For Keynes, though, mon- 
etary policy could not be effective on its own in solving a crisis. So gov- 
ernments had to start spending and make tax cuts, and not worry about 



how to pay for it. This is called expansionary fiscal policy. Just print 
money until the economy comes out of its slump. 

Turner makes the same argument to solve the current crisis. For him, the 
real risk is that central banks won't cut interest rates quick enough and 
governments won't spend and borrow quickly enough. The reason that 
Japan stayed in depression was because the authorities sat on their hands 
for too long. 

Turner's arguments are somewhat ironic. For it appears that capitalist 
governments are all Keynesians now (again). The US Federal Reserve 
under Ben Bemanke has released over $2tm of funds to bail out the banks, 
refinance the money markets and even subsidise insurance and auto com- 
panies. And it has cut interest rates to 1% at a time when inflation is still 
at 5%. The Bank of England has (belatedly) launched a cycle of interest- 
rate cuts and the New Labour government is about to announce a mas- 
sive package of spending and tax cuts to be paid for by borrowing. 

After the Great Depression and the post-war slumps, all capitalist govern- 
ments adopted Keynesian views, culminating in President Nixon"s state- 
ment in 1970 that we are all Keynesians now. But the crisis of the 1970s 
pushed capitalists to try and break the labour movement and restore prof- 
itability that had reached new lows by the end of the 1970s. This led 
capitalists to revert to monetarist economics. 

Government spending was out. As the then UK prime minister James 
Callaghan told the Labour party conference in 1978, "you can't spend 
your way of out of recession". And he then imposed a round of spending 
cuts that led to 'the winter of discontent' in 1978-9 and the eventual de- 
feat of Labour by Thatcher's Tories. 

And yet spending the way out of recession is just what New Labour is 
proposing to do now and what even the US government is doing. Gordon 
Brown has dumped his long-held belief that capitalism can grow 



'endogenously ' without slumps. Keynesianism is back with a vengeance. 
So Turner's answers to solving the crisis are about to be played out. 

Will they work? DidKeynesianism work in the 1930s? It was not really 
adopted in the UK then, but in the US, the New Deal programme under 
President Roosevelt went some way to taking it up with low interest rates 
and public works programmes. What was the result? There was a re- 
covery in the US economy from the bottom of the slump in 1932 up to 
1937. Then the economy entered a renewed slump that was only ended 
with the arms race spending that preceded the Second World War. It 
took a war economy to end the Great Depression, not low interest rates 
and government spending. 

For Marxists, capitalism goes into economic slump because profitability 
drops so much that the mass of profit starts to fall. This leads to capital- 
ists stopping investment in real production. If credit is provided, investors 
use their money to invest in other assets that are not productive like prop- 
erty or speculating in shares. Thus this capital becomes fictitious. It will 
not stop the eventual slump, but merely delay it. 

Once enough capital value (of money, labour and plant) is destroyed and 
profitability is restored, those capitalists that are left will start to invest 
again and the 'liquidity trap' will end. Just as huge dollops of credit will 
not stop a slump under capitalism, neither will huge dollops of credit revive 
capitalism, if profitability is not right. 

The best analogy is this. Marxists say that the capitalist engine works on 
the petrol of profit. The petrol tank is always leaking and eventually the 
engine will stop. Keynesians say the problem is not a leaky petrol tank. 
No, the engine needs oil to lubricate its financial components and some- 
times the oil gets trapped in the sump and does not lubricate. The sump 
needs to be filled to overflowing, then all will be well. 

But Marxists say that even if your oil sump is full and all the cylinders are 
fully lubricated, without the petrol of profit, nothing will start working. 



Sure, capitalism works better if its pistons are lubricated, but putting too 
much oil in can also drown the system. The capitalist engine cannot work 
without fuel, of which there can never be too much. 

Slumps cannot be avoided under capitalism, because they are necessary 
to restore profitability when it gets too low — it means filling up the tank. 
The liquidity trap may be broken by Keynesian policies of low interest 
rates and public spending, but it won't get capitalism going again. That 
only happens when profitability is restored. 

Turner's Keynesian solutions will prove inadequate, as will his naive hope 
that all we need to do is "to even out the playing field, reduce corporate 
power or increase the strength of labour". 

1. Graham Turner has said since that he is no more Keynesian 
than he is a monetarist or a Marxist and that he draws on all these 
theories. Certainly, in his latest book on the crisis, No way to run 
an economy, released as we go to press, he takes a more eclectic 
view, leaning more on Marxist ideas for what he calls the structural 
causes of the crisis, but still relying on Keynes for the policy solu- 




"A British bank is run with precision! A British home demands noth- 
ing less! Tradition, discipline and rules must be the tools; without 
them - disorder, chaos! Moral disintegration! In short, we have a 
ghastly mess ". Mr Banks in Mary Poppins 

"Mr Darling used to boast to Wendy that her mother not only loved 
him, but respected him. He was one of those deep ones who know 
about stocks and shares. Of course, no one really knows, but he 
seemed quite to know and he often said stocks were up and stocks 
were down in a way that would have made any woman respect him ". 
JM Barrie from Peter and Wendy. 

Unprecedented! That was the mantra of the broadcasters, pundits and 
newspapers throughout September, as the credit crisis took a dark turn. 
Credit markets (mortgages, loans for cars and goods, company bonds and 
overdrafts) just dried up. Banks stopped lending even to each other. Li- 
quidity disappeared like water into the Sahara desert. Interest rates rock- 
eted despite the best efforts of the central banks to provide unlimited 
credit at almost any price. 

The capitalist financial machine seized up. Banks started to go bust and 
even countries went bankrupt (Iceland). Nothing has ever been seen like 
it — for the first time in the hyperbole of the news media, it really was 

The difference between what banks were charging each other for loans 
and what they could borrow from the Bank of England, the Federal Re- 
serve Bank of the US or the European Central bank reached unheard of 

This spread fear and loathing through the capitalist financial system. Stock 
markets rocketed up and then fell like a rollercoaster with every piece of 



news. The volatility index of the US stock market hit unprecedented 

Governments of every political hue were thrown into a frenzy of activity. 
First, the right-wing American Republican government announced that it 
was nationalising the biggest mortgage lenders (already semi-government 
agencies); then it proposed a massive bailout package of $700bn to buy up 
all the rotten 'toxic' mortgages and bonds that the banks held and were 
now worthless after the collapse of the US housing market. 

But it didn't work. The crunch grew ever tighter. Finally, the British 
government bit the bullet that it had been avoiding. Gordon Brown and 
Alastair Darling, after months of dithering and denial, decided to part na- 
tionalise the British banks with taxpayers money. The Europeans quickly 
followed suit and even the Americans decided to adopt a similar approach. 
They all had to admit that capitalism could not be saved without state 

As the last few weeks have passed, credit markets have started to ease a 
little and stock markets have stopped plummeting and even recovered 
somewhat. It appears that the end of capitalism has been averted — at 
least for now. And all thanks to state interference — the enemy of 'free 

Take a moment. How did all this come about? How did this seemingly 
'fundamentally healthy' all-powerful financial system become a 'ghastly 
mess'? How did a seemingly strong and ever more 'prosperous' and 
'endogenously growing' (to use Gordon Brown's phrase), capitalist 
economy just drop like a toboggan over a precipice? 

To my mind, it was a combination of what Marx called the most important 
law of motion of the capitalist system and the new forms of anarchic 
excess in capitalist expansion. Take the first component. Marx explained 
that the most important driver of capitalist growth is profitability. Without 
profits, there will be no investment, no jobs and no incomes. Capitahsts 



will not allow production without because they own and control the means 
of production. But capitalist expansion does not proceed in a straightfor- 
ward and orderly progression. Instead, it jumps forward and slumps back 
in an anarchic, unequal and wasteful manner, creating and then destroying 
jobs, incomes and lives. 

Indeed, profitability moves in cycles. Marx's law of the tendency of the 
rate of profit to fall explains that, as capitalism expands, there is a down- 
ward pressure exerted on the profit 'earned' from the capital (money, 
plant, equipment and labour) invested by capitalists. For some time prof- 
itability can rise, but eventually the rate of profit begins to fall, laying down 
the conditions for a crisis — namely a strike of capital, what Marxists call 
a 'slump' and what capitalist economists call a 'recession'. 

In the major capitalist economies, the last up phase in the profit cycle 
peaked in 1997. It had lasted about 16 years from the 1982 trough. From 
then on, profitability began to decline. After the hi-tech stock 
market bubble burst in 2000, it dropped sharply, causing a recession in 
200 1 . It then recovered from mid-2002 to reach a peak (but a peak below 
that of 1997) in 2005. After that, profitability began to slide again. And in 
the latter part of 2007, the total mass of profits, not just the rate of profit, 
fell. A capitalist crisis was brewing. 

The movement of profits is the main law of motion under capitalism, but it 
is not the only one. There are other cycles driving capitalist production up 
and down. One is the building and construction cycle: again lasting about 
16-18 years in its up and down phases. The housing cycle started at its 
bottom in 1991 and rose at an ever increasing pace in the main capitalist 
economies, almost without a break to reach a peak in house prices and 
sales in 2007. But then the bubble burst, as the sheer height of house 
prices finally outstripped the ability of purchasers to buy, even with higher 
incomes or ever bigger and cheaper mortgages. 

Capitalism moves in a succession of booms and slumps — that is normal. 
But each boom and each slump has different characteristics from an- 



other; and what triggers the bust can be very different. In 1974-75, it was 
rocketing oil prices. In 1980-2, it was a housing bust. In 1991-2, it was 
the collapse of the Soviet bloc and another housing downturn. In 2001, it 
was the collapse of the hi-tech mania. 

But this time, in 2008, it was a humungous credit crunch. The 1991-2 
recession was in a period where profitability was in its upward phase. In 
2001, profitability was in its downward phase, but the housing boom was 
still strong. So in both cases, the recession was mild or short-lived. In 
1974-5 and 1980-2, profitability and housing were both going down, so the 
recessions were vicious and long-lasting. The global recession of 2008- 
10 looks like those. 

This cycle of boom and slump had its own peculiar characteristic. The 
boom was driven by housing, sure, but in particular by the expansion of 
new forms of credit. When profitability starts falling, as it did after 1997, 
capitalists look for ways to maintain profit growth. There are many: colo- 
nial expansion, an arms race or an outright war; or nearly always an ex- 
pansion of credit: or what Marx called fictitious capital. 

He said fictitious because it was not a real expansion of values created by 
labour power, but the apparent expansion of value through rising stock 
prices, rising levels of debt and rising house prices. Investment of profits 
made went more and more into unproductive areas that produced appar- 
ent quick bucks. 

So capitalists invested not in new equipment and plant, or new techniques 
so much, but more into real estate or into the stock market or into buying 
what appeared to be very profitable bonds. In this way, profits rose, at 
least for a while. 

In 1980, just 5% of US capitalist profits came from the financial sector 
(namely from bank loans, buying bonds and stocks). By 2007, it provided 
41% of all US profits! Money was being made more and more from 
investing in money! You know that does not make sense and you would 



be right. To make money from money cannot last because eventually 
profit must be generated from the production of real values. 

This was a giant Ponzi scheme, named after the man who invented the 
idea of paying investors big returns by attracting new investors in a pyra- 
mid of money with no actual business involved. Eventually, the pyramid 
topples over under its own weight. 

And so it was this time. The Ponzi pyramid this time was built by invest- 
ing in the great housing boom through buying a share of the mortgages 
lent by the banks at increasingly attractive terms to increasingly risky 
borrowers who could only afford to service them as long as house prices 
kept rising at exponential rates. Investors like a small Norwegian council 
or the British Cat Protection League would be persuaded to buy a bond 
that paid very high rates. This bond was backed by a myriad of various 
mortgages in far-off America batched together and sold on. The bond 
was rated 'triple A' by ratings agencies to give it a high standing so that 
investors could feel confident that their taxpayers' or cat lovers' money 
was safe. 

On this basis, the banks 'shced and diced' up the mortgages to make yet 
more bonds and sell them onto other investors — thus the risk was spread 
far and wide. The further it spread, the more the banks could issue more. 
On top of this, they began to sell insurance on these bonds to make more 
money. As they were triple A rated, it was no problem. 

But it was. The housing market toppled. Prices began to fall and mort- 
gages began to look sick, especially the so-called sub-prime ones sold to 
people with little income to pay them. They began to default and lose their 
homes. And the banks were left with 'toxic' assets. The credit pyramid 
crumbled. And this particular credit collapse is unprecedented. 

However, government action (taxpayers money and huge government 
borrowing) has come along to save the fat cats in Wall Street and the City 
of London from pulling us all down into the abyss. Of course, that does 



not mean that a recession has been avoided. At the very best, a Great 
Depression as experienced in the 1930s has been averted (ahhough then 
it may be too early to say). But the boom and slump of capitalism has 

Only fools and knaves argued that the cycles of capitalism had gone for- 
ever There were and still are plenty of fools and knaves. Take Mr 
George Mudie, a Labour MP on the esteemed UK parliamentary Treas- 
ury committee (supposedly composed of people who know about the 
economy and finance). Just last April, the honourable Mr Mudie pro- 
nounced: "1 do not see how anyone can table a motion that suggests we 
are nearing a recession and that we are in all sorts of economic gloom... 1 
cannot see how anyone can come to the House and say there will be a 
recession." Mr Mudie "s words were repeated and echoed by PM Gordon 
Brown, Chancellor Darling, America's Treasury secretary. Hank Paulson 
and many others of the 'great and good' (or is that fools and knaves?) — 
until recently. 

Suddenly, Alastair Chancellor Darling reversed course and said the UK 
faced the worst crisis in 60 years, just before he announced (reluctantly) 
the nationalisation (temporarily) of the banks. 

All the great and good now scream for regulation and control of the ex- 
cesses that brought capitalism to its knees. But they sang a different song 
just months ago, demanding yet more 'deregulation' and 'free markets". 
Indeed, the UK's Financial Services Authority, supposedly the guardian of 
the public interest against reckless and fraudulent behaviour by the banks 
and financial institutions, has had to apologise in public for its failure to 
notice anything wrong! 

But don't worry Gordon Brown is now appointing people to clean up the 
City of London. Who? Well step forward Lord Adair Turner, former 
head of the bosses union, the CBl and vice chairman of the bust Ameri- 
can investment bank, Merrill Lynch. And with him will be Sir James 
Crosby, the former head of HBOS, the failed UK mortgage lender. And 



then there is Sir John Grieve, the former deputy head of the Bank of 
England and responsible for financial supervision. Talk about poachers 
becoming gamekeepers! 

Now there is much talk of ending the lavish salaries and bonuses of the 
financial fat cats. But don't hold your breath. In 2008, bonuses in the City 
of London will hit a record £16bn, more than triple that of 2001. At the 
same time, employers announced that they would try and defer pay rises 
for their workers to 'control costs'. In the US, Wall Street bonuses will 
reach $70bn this year even though stock prices of the banks have plum- 
meted and the government is to plough $700bn into the banks to save 
them from their follies. 

And remember just 1% of American households own 25% of all Ameri- 
ca's wealth in homes, stocks and businesses, while half of Americans 
have lost as much as $2trn in the last 15 months from the value of their 
pension funds invested in the stock market. Both Americans and Britons 
about to retire will take a huge cut in their retirement incomes. So much 
for control of the fat cats. 

And when we move from the UK to the world, we can see who is going 
to pay for this slump. According to a UN report, upwards of 20m people 
globally are set to lose their jobs next year as a result of the coming reces- 
sion, taking global unemployment to 2I0m in 2009, the first time it has 
topped 200m - unprecedented! 

Nothing can stop the oncoming recession. The IMF now expects global 
growth next year to be just 3%, which means rising unemployment in the 
majority of so-called 'emerging economies" like China, India, Brazil, Ar- 
gentine, Turkey and eastern Europe. In the advanced capitalist econo- 
mies, British, American and European national output is already falling 
along with Japan. There is going to be 'negative growth' this year and 



In the face of disaster, many capitalist apologists are ditching their cher- 
ished beliefs in free markets, deregulation and balanced budgets and turn- 
ing back to the ideas of John Maynard Keynes, the British aristocrat and 
economist of the inter-war years. He argued that there was nothing wrong 
with the capitalist system of production. It was the financial sector that 
was the problem. It suffered periodic credit crunches and slipped into 
what he called a liquidity trap where banks would not lend to businesses 
or workers. 

That sounds familiar. Keynes' solution, along with lower interest rates 
and government-backed liquidity was state spending and government 
projects to provide income and jobs. It seems that Chancellor Darling 
plans something similar; and all round the world governments are raising 
borrowing and running up deficits to 'unprecedented' levels. 

But it won't work. At the heart of the crisis is the lack of profitability. 
Profits have been falling quarter by quarter and are set to fall further until 
enough fictitious and real capital is destroyed in value to create a bottom 
in profitability. 

A slump is needed to cleanse the capitahsm system of 'excess capital', 
expressed in 'overproduction' . There will be no bottom until mid-2009 at 
the earliest, probably later. Then there will be a gradual and weak recov- 
ery. But profits will not return to levels of 1 997 or even 2006. We are still 
in the downphase of the profitability law of motion of capitalism. Eventu- 
ally, another slump will occur, probably about 2014-15, which will be deep 



The Great Recession 

It is the working class of the world who will really suffer from the present 
crisis. Globally, the UN estimates that unemployment will reach 220m this 
year. Out of a global workforce of about 3 billion, that's "only" 7%. But 
this figure leaves out millions of hidden unemployed who just cannot even 
begin to look for work. And as a percentage of those working in sweat 
shop and factories around the globe, it is more like 20%. 

As I write, the New York stock exchange index fell to its lowest level in 
six years as the big financial institutions and investors in company stocks 
slipped into the depth of despond about the state of the world capitalist 

And these investors have every reason to feel depressed. The world 
economy, by most estimates from the major international institutions, will 
contract this year for the first time since the 1940s. And by the world, 
they mean everywhere, not just in the advanced capitalist economies. 

China is now slowing to an official real GDP growth rate of just 5% a year 
from 1 1% lastyear (and in reality is probably hardly growing if the meas- 
ure of electricity consumption by businesses, factories and homes is any- 
thing to go by). 

It's the same story across the rest of Asia. Japan has just announced that 
its economy shrank by the biggest amount in 27 years in the last quarter of 
2008. Singapore and other south-east Asian economies are also diving, as 
their exports to Europe and the US screech to a halt. 

The worst-hit are the former 'Communist' countries of Eastern 
Europe. Having thrown in their lot with capitalism after the collapse of the 
Soviet Union, the ruling elites of these countries must now explain to their 
people why their economies will contract by as much 10% in one year! 



Even more disastrously, many of these countries (Hungary, Poland, Czech, 
Romania, Bulgaria and the tiny Baltic states) had promoted a huge prop- 
erty boom similar to that in the US, the UK and parts of Western Europe. 
People, thinking they were now to benefit from the fruits of capitalist 
progress, took out big loans, not in their own national currencies, but in 
cheaper foreign currencies like Swiss francs, euros and even Japanese 

That has now backfired badly. As their national currencies have plum- 
meted in value, by over 30% in just the last few months, the cost of paying 
their monthly mortgages in euros etc has rocketed. So many people are 
losing their jobs and their homes at the same time. 

Of course, the locus of this economic slump, the deepest since the 1930s, 
was in the biggest capitalist economy, the United States. This huge economy, 
producing around $14tm a year in output value, is now falling back at a 
rate of 5% a year. Unemployment is racing upwards, millions of home- 
owners face the threat of eviction, wages are being cut and the value of 
pension funds built up by millions of working people for their retirement 
have been cut by 40%. 

In desperately trying to bail out the banks and financial institutions that 
triggered this crisis, the Obama administration is ploughing trillions of dol- 
lars of state funds and paying for it by increasing the public sector debt to 
100% of annual output. The cost to the taxpayer is twice the size of the 
cost of the Vietnam war and approaching half the cost of World War 2! 
Down the road, working people will not only have to pay for this capitalist 
mess through job losses, wage cuts and home foreclosures, but also through 
sharply increased taxes to pay for helping the bankers. 

It's the same story, only worse, in the UK. The property slump (with home 
prices heading for a cumulative 30% fall) has made a joke of the old 
Thatcher slogan of a 'property-owning democracy'. The stock market 
slump in the City of London has been just as big as in the US — again 
making a cruel laugh of the stock market boasts of the privatisation era of 



the 1990s. Remember, we were told by the sellers of state assets, that 
we could make profits by buying all those shares, and even more by get- 
ting shares for free if we agreed to allow building societies to become 
banks; banks to become real estate agents; and retailers to become mort- 
gage lenders. 

Now the value of the biggest building society in Britain, the Halifax, is 
zero, swallowed up in the semi-nationalisation of the banking system. 
British Telecom, once the state-owned telephone company, privatised in 
the 1980s and revamped in the 1990s, is now virtually bust in this crisis. 

The UK economy is contracting by up to 4% a year and will have the 
worst economic performance in 2009 of all the top seven capitalist econo- 
mies — so much for New Labour's (in particular, Gordon Brown's) boast 
that the "boom and bust' British economy was over under their 
stewardship. New Labour has been even more naive about the credit 
crunch and even more 'in denial' than the Conservative opposition. 

Overnight, from being the standard bearer of the 'free market', offering 
minimal regulation of the City of London; favouring a reduction of taxes to 
big business; and a major supporter of privatisation, Gordon Brown has 
become a fervent supporter of Keynesian policies of public sector spend- 
ing and borrowing; of the regulation of the banking sector; and wanting to 
'control' the huge bonuses paid to the top executives in the City; and even 
applying virtual nationalisation of failing banks. 

What hypocrisy! Gordon Brown used to argue that British capitalism, with 
the right policies adopted from America, could be made to expand 
'endogenously" without slumps or "cycles'. That was the theme of his 
main economic advisor, Ed Balls, now in the government. Now Mr Balls 
tells us we are in the worst economic slump for 100 years! 

And what of the bankers who kicked this all off with their greed? The 
heads of the British banks recently went to parliament to explain how this 
had all happened. They started off by saying they were very, very 



sorry. . . .but. But there was no way anybody could see this was going to 
happen. It was like a tsunami sweeping away all their clever plans and 
investments overnight. They told the politicians it was a chance in a mil- 
lion that nobody could have predicted, just as nobody thought there were 
black swans in the world until Captain Cook got to Australia in 1780. 

The same excuse was echoed by Gordon Brown at the G7 finance minis- 
ters meeting before he had an audience with the pope (I hope they both 
prayed hard!): the crisis was like a hurricane that came from nowhere. 

According the head of "Financial Stability' at the Bank of England, the 
bankers did not see the credit crunch coming because their 'risk models' 
only went back ten years and did not take into account that capitalism has 
had slumps before that! 

Indeed, the banks' risk models said that the chance of what has now 
happened was one in 13.5 billion years! As scientists currently reckon the 
universe is about that age, that means what has happened to the British 
and world economy in the last 18 months, according to the bankers, was 
impossible. So much for risk models and stable capitalism. 

Of course, all these explanations are really pathetic excuses. There were 
a few voices even among capitalist strategists, apart from Marxists, who 
forecast the calamity that was coming from the massive expansion of 
'fictititious' capital in form of cheap credit, rocketing property prices, ever- 
expanding stock market prices that were not matched by any equivalent 
expansion of real production values. But those voices were swamped by 
the screams of ecstasy from bankers with their big bonuses and from rich 
investors with their rising wealth in property and shares. 

Now, whether it is the bankers, the investors, the regulators or the pro- 
capitalist politicians, they are all screaming murder, while at the same 
time, saying it had nothing to do with them and could not have been pre- 
dicted or avoided. 



And all the dirt and sleaze is now crawling out of the woodwork. The 
workings of capitalism are always full of theft, swindles and cheating. But 
they are often remain hidden when all seems well and everybody is mak- 
ing money. But now it is the opposite, some of the swindlers are being 
found out, like scum coming to surface of stagnant water 

Bernard Madoff is an eminent New York financier He had investment 
funds that you had to be invited, as a rich person, to invest in! He had 
been head of the New York stock exchange's regulation committee. He 
supported with funds many politicians and arts centres. He is the very 
epitomy of capitalism — a crook. Every year he was able to provide his 
clients with regular 10%-plus gains on their investments, whatever the 
fluctuations of the stock market. How was this brilliant work possible? Well, 
we now know it was a swindle. 

Madoff was using each new amount of money invested to pay back the 
existing investors when they wanted their money. Of course, many did 
not ask for it back and happily received their annual accounts showing 
their gains (these were completely phoney). Using new money to pay old 
is called a Ponzi scheme, after the man who first adopted this form of 

Once the credit crunch began, more investors needed their money back 
and suddenly Madoff did not have enough new investment money to cover 
paybacks. Eventually, he owned up, claiming that he did it all on his own 
for over 30 years to the tune of losses worth up to $50bn — the biggest 
swindle in the history of the world! 

Many so-called 'financial experts' had invested client money with Madoff 
because as experts they knew he was good. The British 'superwoman' 
financier, Nicola Horlick, had told her investors that Madoff represented 
exactly the sort of expertise that people like her provide and justified why 
he and she should be paid mega millions in fees and bonuses. Her advice 
has led to losses of $70m for her chents. This is yet another reason for 
never believing anything a capitalist expert tells you! 



One fraud usually leads to another. The Madoff collapse has meant that 
other dodgy financiers who had invested with him were also exposed. 'Sir" 
Allen Stanford is a Texan billionaire who has a set of banks across the 
Americas and is the biggest employer in parts of the Caribbean, where he 
has become a major sponsor of cricket, the sport of the British Empire. 

Cricket organisers in the UK and the West Indies have fawned over him 
for his money; while poor Antiguans depend on him for jobs and their 
savings. Now Stanford has been cited by the US Securities and Exchange 
Commission for a similar Ponzi-type fraud worth up to $8bn. Investors 
and savers around the Caribbean look like losing all their money too. 

As capitalism descends deeper into slump, it is not just all the 'fictititious' 
capital that is being destroyed. Capitalism can only reach a bottom if it 
also destroys the value of real capital too. In order to restore profitability 
for capitalist industry, workers must be sacked and wages cut to lower the 
cost of what Marx called 'variable capital' and the factories must be closed 
and businesses put into bankruptcy in order to reduce the cost of what 
Marx called 'constant capital'. 

Once production costs are cut back significantly, then profitability will 
stop falling. After all, there will still be businesses left, there will be still 
workers in jobs and there will still people with homes — just a lot less of 
them. Then the world capitalist economy will start a slow and painful proc- 
ess of recovery. 

When will that be? How long is a piece of string? Most capitalist slumps 
last about 18 months or so. This one began somewhere in the first half of 
2008. So it will likely not reach a bottom before the end of this year. But 
this crisis is way worse than any capitalist slump that we have seen since 
the 1930s — and it could be worse than that. So it could well last into 

That would especially be the case if each national capitalist economy 
starts to turn on the others to protect itself ' Globalisation' was the theme 



of the 1990s, where national capitalist states combined to reduce trade 
barriers and allow the 'free' movement of finance. Now the trend is to- 
wards the protection of national interests. Barack Obama talks of a 'Buy 
America' campaign and Gordon Brown bellows for 'British jobs for Brit- 
ish workers" in a feeble attempt to curry votes. What Brown is really 
offering is 'British dole for British workers'. 



The Great Recession 
— after 

'To kill an error is as good as a service as, and sometimes even 

better than, the establishing of a new truth or fact. " 

Charles Darwin 

"There is nothing new except what is forgotten " 
Rose Bertin 




Human nature and capitalist crisis 

Alan Greenspan has just turned 83 years old. He was Chairman of the 
US Federal Reserve Bank for over 19 years before he stepped down in 
January 2006, just as the great boom turned into the awful credit crunch 
and brought global capitalism to its knees. 

Greenspan presided over the biggest credit boom in capitalist history and 
the largest rise in property prices that the US had ever seen. He was 
praised to the heights during those years and as the helmsman of capitalist 
success globally and in America. Bob Woodward, one of the journalists 
who exposed the Nixon Watergate scandal back in the 1970s, wrote a 
book about Greenspan in the year 2000, in which he described him as 'the 
maestro' \ 

Back then, Greenspan claimed the hi-tech and internet revolution of the 
1990s set the scene for an uninterrupted period of economic growth for 
capitalism based on increased productivity from new technology. But 
then came the so-called dotcom bust, when thousands of tech companies 
went bust and stock markets collapsed (they have not returned to the 
levels of 2000 even now). 

Then Greenspan described the booming property market of the early 2000s 
as an exciting way to expand the economy and the new forms of credit 
like derivatives that it engendered as wonderful innovative instruments to 
reduce risk and boost growth. Then came the property bust of 2007 
onwards and the biggest credit crunch in human history. It's not a great 
track record. 

Over the Easter weekend, Greenspan was interviewed on the US cable 
TV business channel, CNBC, about why the great boom turned into the 
biggest economic slump for capitalism since the Great Depression of the 
1930s. He said it was not because he and other bankers who ran the 
citadels of finance capital were stupid. 



That conclusion was in sharp contrast to the answers that the top bankers 
in Britain gave to the House of Commons Select Committee. When they 
were asked what went wrong, they said it was a financial tsunami that 
came fi^om nowhere, that nobody could have predicted, a one in a billion 
chance — not their fault. 

Greenspan differed. It was not because the bankers were stupid; "they 
knew what was going on; it's just that they thought they could get out 
before everything came to an end". As Chuck Prince, the head of the 
now bankrupt US investment bank Bear Stearns said at the time: "we 
know the party will come to an end, but while it lasts, we have to keep on 

Greenspan argued that what brought everything down was sheer greed. 
The bankers knew they were being reckless; they laiew that what goes 
up must eventually come down. But they just went on because they had 
to make more and more money for their shareholders and for their bonus 
payments. Greed was the driver But Greenspan said greed is "human 
nature", so this boom and bust will happen again some time in the future. 

There we have it. For Greenspan and the ideologists of capitalism, it is 
'human nature' that caused the crash and the slump, not the particular 
form of social and economic organisation that he operated under and sup- 
ported. But human beings can be "greedy and selfish" and they can be 
'cooperative and selfless". It depends on the circumstances. 

Capitalism is a system of production of goods and services for profit; it is 
built on competition, on the drive to make more money (not things or serv- 
ices people need). It is a system designed to promote greed and selfish- 
ness. The "human nature' that Greenspan blames for the economic crisis 
is nothing more than the capitalist system at work. 

The booms and slumps of the global economy began with capitalism. In a 
recent study by Carmen Reinhart and Kenneth Rogoff of the US National 
Bureau of Economic Research (NBER) on banking crises-, they found 



that from the very early beginnings of capitahsm in the 14* century up to 
the present day, there have been booms and slumps brought on by the 
operation of a system of production based on profit, competition and pri- 
vate appropriation of value. 

Reinhart and Rogoff concluded that, as capitalism spread its tentacles 
across the world from the 18* century onwards, so the frequency and 
scope of economic crises grew. Sure, there had been crises of production 
before capitalism, based on famine as harvests failed or due to conquests 
from foreign invasions. But economic crises due to the failure of money, 
credit and banks are uniquely capitalist. 

According to the NBER, there have been 64 'official' slumps in capitahst 
production since 1854 — 'human nature' is powerful, it seems. What a 
waste of output, economic resources and above all, what damage to peo- 
ple's lives in the loss of jobs, homes, well-being and even early deaths that 
slump and economic depression brings. 

Most important, Reinhart and Rogoff concluded that as capitalism was 
increasingly free from government regulation and control and became 
more 'globalised', so crises grew in number and impact. Indeed, this 
latest period of globalisation since the 1980s was not one of success in 
reducing booms and slumps, as the likes of Mr Greenspan and other capi- 
talist economists have argued, but quite the reverse. The last 25 years 
have seen more financial crises than ever: in emerging economies (1980s 
and 1990s), Asia (1997-99), Japan (1990s), US loan companies (1990s); 
Nordic banks (1990s) and so on. 

Alongside the waste of resources from capitalist slumps comes inequality 
and injustice. Branco Milanovic of the World Bank has analysed the level 
of inequality of income and wealth in the world of capitalism. In 2002, he 
found that if he divided the world's population into three groups: those 
with incomes greater than the average income of Italians could be re- 
garded as rich; those with incomes less than the poverty levels of the 
advanced capitalist economies could be considered poor; and those in 



between could be categorised as middle-class. Milanovic found that 78% 
of the world's 6bn population were poor and 11% were rich, with another 
1 1% being middle-class. 

In 2007, Milanovic redid his sums and he found that he had underesti- 
mated the inequalities^ It really was a 20: 80 split between rich and poor. 
Indeed, the top 10% of the world's population had 39 times more income 
than the bottom 10% — and it was getting worse. 

But nothing beats this current financial crisis, except perhaps the Great 
Depression of the 1930s. This credit crisis has triggered off a major 
slump in capitalist production. There is a crisis of over-accumulation of 
capital relative to profit: the mass of profit in the US, Europe and Japan 
fell by the biggest margin ever in the last quarter of 2008. That has led to 
an 'overproduction" of goods and services globally on a scale not seen for 
over 60 years. 

All the capitalist economists are agreed that the advanced capitalist econo- 
mies are in slump, with annual output after inflation falling by up to 5-6% 
across the board in 2009. In the less advanced, so-called 'emerging econo- 
mies', the situation is even worse, with falls in production in newly con- 
verted to capitalism Eastern Europe likely to be over 10%, in Singapore 
and other Asian exporting countries even more. 

The question now is how much longer the slump will last. The Great 
Depression was called that because the slump did not end after a year or 
so. It started in summer 1929 and continued through to March 1933 (43 
months). Then there was a recovery for a while, lasting until May 1937, 
before the slump resumed. Only preparations for the terrible world war 
of 1939-46 and the temporary ending of much of the capitahst system of 
production cut across the slump. 

Since 1945, the average capitalist slump has lasted ten months, a much 
shorter period than before. The NBER says that this slump began at the 
end of 2007. So already this crisis has lasted 16 months and will continue 



for at least double the previous post-war average. But will it be longer 
than that even? 

Most capitalist economists say no. They reckon that the huge bailouts of 
the banks and other financial institutions with taxpayer's money, plus the 
massive expansion of government spending and tax cuts to 'boost' de- 
mand in the economy will turn things around. 

But this will not provide a turnaround in profitability. Banks and busi- 
nesses may get government funding, but you can lead a horse to water, 
you cannot make it drink. Not until profitability improves will investment 
start again; job losses stop rising; and house prices bottom. And for that to 
happen, capitalism needs to destroy more of the weak. 

There is an air of optimism in the ranks of capitalist investors on the stock 
exchange. After a reaching yet another new low in stock prices in March, 
the stock indexes have risen nearly 30% since as governments pump in 
public money and banks claim they are starting to make profits again; 
there is even talk of a 'bottoming' of the housing market in America and 
Britain; while China is supposedly about to renew its strong growth after 
a pause. 

But this is more wishful thinking than judgement. 1 suspect that there are 
more shocks to come before we reach the bottom of this nightmare slump. 
The banks may be 'saved', but many businesses are set to go belly up this 
year and the jobless rate is nowhere near its peak yet. House prices still 
have further to fall and capitalist profits too. 

And there is the payback afterwards. That's likely to be so large as to 
keep capitalism comatose like a zombie for years ahead. The bailouts, of 
course, are socialism for the rich, while working people get capitalism in 
the shape of job losses, wage cuts, repossession of their homes and soon 
reductions in public services and higher taxes. 



Gordon Brown, Barack Obama, and most of the political leaders of capi- 
talism tell us that they are putting in such huge amounts of money to 
stabilise the capitalist system. For the moment, governments are increas- 
ing their debt and borrowing to take on the rotten debt of the bankers. 
They are paying for this borrowing by printing money (sucking funds out 
of thin air). 

But there is no free lunch (except for bankers). Eventually, all this public 
sector debt (likely to hit 100% of annual output in the UK, the US and 
others) will have to be paid back or serviced with interest in perpetuity. 
That means higher taxes and reduced public services. It means pensions 
and benefits for the old, the sick, the carers and the unemployed must be 
massacred. Capitalism cannot be revived without the help of the state 
and that means us. 

1. Bob Woodward, Maestro, How Alan Greenspan conducted the 
economy, 2000 

2. C Reinhart and K Rogoff, This time is different 2009 

3. B. Milanovic, Worlds Apart, 2007. 



Cycles and crisis 

The Kondratiev prices cycle is about 64 years long and the Marxist prof- 
itability cycle is about 32 years long — trough to trough. So for example, 
the Kondratiev prices cycle peaked in 1920 and also in 1982 and troughed 
in 1884 and 1946. The Marxist profit cycle, being smaller in duration, 
peaked in 1964 and 1997 and troughed in 1946 (matching Kondratiev) and 
1982 (when Kondratiev peaked). 

By feeding in the profit cycle, you can break up the Kondratiev cycle into 
'seasons': spring, summer, autumn, winter^ Thus, in a Kondratieff spring, 
prices are rising and so is profitability; conversely in a Kondariev winter; 
prices are falling and so is profitability (that's the stage we are in now). 

If we link the environment of capitalist boom and slump and class struggle 
to these seasons, we come up with an interesting set of predictions. It 
seems that in Kondratiev springs, capitalism booms and the working class 
grows in strength, but without taking on the capitalist class in major strug- 
gle. That makes sense as profitability is only rising after a major period of 
depression or war that workers must still recover from. 

In Kondratiev summers, profitability falls, capitalism goes into crisis and a 
stronger working class engages in heightened struggle. In Kondratiev 
autumns, profitability rises after a series of recessions and defeats that 
have weakened workers, allowing a capitalist boom and a more passive 
working class. In Kondratiev winters, profitability falls again and capital- 
ism enters a period of depression and sometimes wars, with workers try- 
ing to defend their positions, but on the back foot. Then the cycle starts 
again as we enter a Kondratiev spring. 

If this is right, then we are now in a Kondratiev winter with prices falling 
(disinflation turning to deflation) and profitability falling through a series of 
recessions/slumps to around 2014. 



Here is the bad news: the current phase is not necessarily an environment 
for major class struggle; instead it is one for workers to be on the defen- 
sive, facing reactionary warlike movements. From 2014, we would enter 
a Kondratiev spring where capitalism would boom on the back of capital 
destruction from previous recessions (and maybe war) and workers would 
gradually renew their strength. 

From 2030, we would enter a new Kondratiev summer, when profitability 
would fall, capitalism would be in crisis again and class struggle would 
reach a peak. This would last until 2046. This is really what we call the 
long view! 

1. See Michael Alexander, The Kondratiev cycle, 2002 



Marxist theories of crisis 

Marx never fully developed a theory of economic crisis in one place in his 
writings. There are many thoughts and ideas spread through all his works. 
And his conception of capitalist crisis was fledged out over the years. 

As a result, Marx's writings are sometimes ambiguous and open to signifi- 
cantly different interpretations. Many of his followers in the socialist 
movements immediately after his death in 1883 never read all the three 
volumes of Capital, with the latter two only put together from Marx's 
notes by Engels and later Kautsky. And most were unaware of the other 
notebooks that contained an analysis of capitalist crisis, like Grundrisse 
or the volumes of the Theories of Surplus Value. 

As a result, this led to a distorted and unclear view of Marx's theory of 
crisis. The mainstream Marxist explanation that was taken up by the 
leadership of Marxist movements swung between two schools. 

The first was that capitahst crisis was a crisis of overproduction. Capital- 
ism was bound to go into crisis because capitalists accumulated and pro- 
duced blindly without taking into account the demand for their production. 
They squeezed the workers' wages and employment and as a result could 
not sell all their goods to the workers. This problem of endemic overpro- 
duction was compounded by the existence of money capital. Money could 
be 'hoarded' or saved and not spent. Thus not every seller would have a 
buyer, opening up the possibility of a crisis of overproduction. 

This overproduction or underconsumption view of Marx's theory of crisis 
has some validity. After all, Marx did say that 'The last cause of all real 
crises always remains the poverty and restricted consumption of the 
masses as compared to the tendency of capitalist /production to de- 
velop the productive forces in such a way, that only the absolute 
power of consumption of the entire society would be their limit'. ' 



But perhaps the phrase "the last cause" gives the game away. Marx is 
saying that once the crisis is under way it is the insufficient funds of the 
workers that makes it impossible for capitalism to avoid a slump. But the 
last cause is not the first. Moreover, to accept overproduction or 
underconsumption as the cause of crisis would be suggest that capitalism 
is not just prone to crisis but that it is impossible - because the working 
class can never buy all the goods that they have produced. That is be- 
cause the value of those goods must by definition be greater than the 
value paid to the workers as variable capital. 

Overproduction is what the slump is by description, but not the cause. As 
Marx made clear in another passage. "It is a pure tautology to say that 
crises are provoked by a lack of effective demand or effective con- 
sumption ... The fact that commodities are unsaleable means no more 
than that no effective buyers have been found for them ... If the at- 
tempt is made to give this tautology the semblance of greater profun- 
dity, by the statement that the working class receives too small a por- 
tion of its own product, and that the evil would be remedied if it re- 
ceived a bigger share, i.e. if its wages rose, we need only note that 
crises are always prepared by a period in which wages generally 
rise, and the working class actually does receive a greater share in 
the part of the annual product destined for consumption. From the 
standpoint of these advocates of sound and 'simple ' (!) common sense, 
such periods should rather avert the crisis. It thus appears that capi- 
talist production involves certain conditions independent of people 's 
good or bad intentions, which permit the relative prosperity of the 
working class only temporarily and moreover always as a harbinger 
of crisis. ' .- 

Engels also criticised this view of capitalist crisis, "the underconsumption 
of the masses, the restriction of the consumption of the masses to 
what is necessary for their maintenance and reproduction, is not a 
new phenomenon. It has existed as long as there have been exploit- 
ing and exploited classes. The underconsumption of the masses is a 
necessary condition of all forms of society based on exploitation. 



consequently also of the capitalist form; but it is the capitalist form 
of production which first gives rise to crises. The underconsumption 
of the masses is therefore a prerequisite condition for crises, and 
plays in them a role which has long been recognised. But it tells us 
just as little why crises exist today as why they did not exist before ' .' 

The other school of Marxist thought on capitalist crisis is that crises come 
about because of the anarchic and unplanned nature of capitalist produc- 
tion". That leads to disproportionalities in various sectors of the economy, 
which eventually dislocate it. Under this theory, overproduction is not the 
cause. Capitalists compete viciously with each other for market share 
and in so doing produce blindly without care for the market. 

The disproportion theorists have one thing in common with the 
underconsumptionists. They both ignore or dismiss what Marx called the 
most important law of motion of capitalism, the tendency of the rate of 
profit to fall. Apparently, all the writings that Marx makes about profit- 
ability plays no role in the boom and slumps of capitalist production. 

But not only is it empirically wrong to deny the role of profitability in 
causing capitalist crisis, it is also not a true interpretation of Marx's own 
view. Profitability has a big advantage over the other interpretations of 
the Marx's theory of crisis. It is measurable and thus provides a scientific 
method of prediction. If profitability is measured as falling over a long 
period, that will be a very good indicator of an oncoming slump. Overpro- 
duction can only be measured when the crisis is upon us — because it is 
a description of the crisis not a cause. Similarly, disproportion is very 
difficult if not impossible to measure and thus does not provide much pre- 
dictive power Falling profitability does not cause crisis as such: it creates 
the conditions for the mass of profit to fall (or grow so slowly that capital- 
ist consumption is affected) and this is what kicks off crisis'. 

The profit cycle is a relatively long term (16-18 year phases up or down) 
process. We are now in a down phase for profitability and even though 
the rate of profit rose from 2002 to 2005, this is still in a period where 



Marx's law of the tendency of the rate of profit for fall is operating in a 
down phase and thus creating the conditions for more and deeper crises 
as in the period of 1965-82 (that downphase had the most and worst post- 
war slumps — until now). 

The rate of profit rose from 2001 to 2005. So does that mean the Great 
Recession was not caused by declining profitability? The answer is that 
by 2005, the value rate of profit began to fall again. It had never sur- 
passed the level reached in 1997. That is why the huge expansion of 
fictitious capital from 200 1 with new forms of credit collapsed into the 
biggest crisis since the 1930s. 

The way to think of it is the opposite of the underconsumptionists: the 
overaccumulation of capital relative to profitability leads to overproduc- 
tion relative to effective demand — not the other way round. As Marx 
put it: ''Overproduction of capital, not of individual commodities (al- 
though over-production of capital always includes over-production 
of commodities) is therefore simply over-accumulation of capital... The 
purpose of capitalist production, however, is self-expansion of capi- 
tal, i.e., appropriation of surplus -lab our, production of surplus-value, 
of profit. " * 

1. Karl Marx, Capita/ Vol III, Chapter 30. 

2. Karl Marx Capital Vol II,Chapter 20. 

3. Friedrich Engels, Pre face to first edition o/ Capital Vol II. 

4. Leading Bolsheviks like Lenin and Bukharin saw capitalist 
crises as a product of disproportion and anarchy in production. 
See Bukharin, Imperialism and the world economy. Also see Simon 
Clarke, Marx's theory of crisis, 1994. Clarke argues that Marx also 
held this view — / don 't agree. 

5. See Chapter 24. 

6. Karl Marx, Theories of Surplus Value, Chapter XVII 



The Great Recession — is it over? 

For the capitalists, this Great Recession is more or less over. The pace of 
decline in the major capitalist economies slowed in the second quarter of 
this year. Indeed, in some major economies like Germany and France, 
national output rose. And in some smaller ones like Australia and Nor- 
way, there was a small pick up in growth. 

At the same time, the larger, less mature capitalist economies like India 
and Indonesia continued to grow, while China also maintained positive 
growth. Indeed, in Asia's less developed capitahst economies, which con- 
tribute about 10-15% of global output, industrial production is up sharply. 

On many measures of capitalist economic activity, the worst appears to 
be over — at least for now. Measures of business confidence have turned 
up — they may not indicate much growth but they do indicate a bottom. 

The stock markets of the major economies have experienced a massive 
rally in prices. From lows in March, there has been a 50% rise in stock 
prices across the board, led by the financial sector and bank shares. Share 
price indexes are still well below the peak at the start of the Great Reces- 
sion in October 2007, but at least they are going in the right direction for 
capitalist investors. 

The epicentre of the crisis that triggered it all was the housing market, 
particularly in the US, but also in Europe and other capitalist economies. 
Prices of the average home in the US have plummeted by 30% from their 
peak, and similar falls have been experienced in the UK. Sales transac- 
tions and mortgage applications have fallen over 75%. But in the last few 
months, there has been a stabilisation of sales and even a small increase in 
prices in certain countries. The bottom of the housing bust is nearly there, 
even though prices could fall further yet as unemployment rises and more 
people default on their mortgages. 



The OECD and other economic forecasters have now upgraded their 
estimates of growth in national output for the major economies. They 
now expect GDP to rise in the US and Europe in this third quarter of 2009, 
with the UK lagging behind and not recovering until Christmas. But re- 
covery is now underway. 

The OECD now forecasts that the Great Recession that officially started 
in 2008 will have fallen 3.7% in the top seven capitalist economies this 
year. That follows a 4% plus decline in 2008. So this recession will mean 
that the top seven economies will have lost 1 0% of their national output in 
less than 18 months. But it is even worse than that if you take into ac- 
count the loss of potential output that should have been achieved by these 
capitalist economies of say 3% a year. In effect, 15% of output has been 
lost forever. 

Also staggeringly, we have seen a fall in world trade of about 15% in real 
terms since the start of the Great Recession — the whole capitalist world 
has been involved and there has been no escape for even the less devel- 
oped capitalist economies of Asia, Latin America and Eastern Europe 
(and of course Africa). 



Indeed, the former planned economies under the Russian axis that be- 
came capitalist economies in the 1990s after suffering a massive decline 
in living standards have now suffered the most acute depression in their 
living memory with falls in national output of 10-25% in one year! So 
much for the freedom of the market! 

It was the same story for profits. As a percentage of national output, US 
pretax profits had reached 2 1% in 2006 and then began to slip. During the 
recession of the last 1 8 months, profits fell to just 14% of GDP. But in the 
last two quarters, US profits have risen back to 16% of GDP. 

As for the global financial system, the IMF now puts the total loss from 
the credit crunch at $3.4trn, or 6-7% of world GDP, lost forever By 
region, the IMF reckons that half of the forecast losses for the banks of 
$2.8trn will be incurred by European banks (including the UK) while the 
US banks will suffer about $Itm in losses'. 

According to the latest data, global losses for all sectors of the financial 
sector have now reached $I.6trn and for the banks alone at $I.Itrn- — 
way larger than the great and good said would happen. Back in Novem- 
ber 2007, Bemanke said that the losses would be a maximum of $I50bn! 

World export growth (% yoy) 

70.0 n 

o o o o o o 





And both the IMF and the OECD have had to raise their loss forecasts at 
regular intervals. 

Regionally, the admitted losses so far have fallen on the US overall at 
$1. Itrn, Europe at $500bn and Asia at just $40bn. With the banks, it has 
been $660bn for the US banks, $470bn for Europe and just $40bn for 
Asia. So the US banks have suffered about 65% of their ultimate losses, 
while the European banks have admitted about only 40% of theirs. The 
ECB says Eurozone banks face another $300bn in further losses. 

The key question now is whether the banks and other financial institutions 
(insurance, pension funds and hedge funds) have raised enough capital to 
cover future losses (assuming that these institutions can also make profits 
from hereon to help restock capital reserves). 

The latest data show that globally financial institutions have raised $ 1 . 3tm 
in new capital (sourced both from state funds and private investors) com- 
pared to estimated losses of $1.6tm. US institutions have raised $750bn 
compared to losses of $ 1 . Itm so far and European institutions have raised 
$460bn to nearly match losses of $500bn. For banks alone, $ 1 . Itm in new 

Global financial system losses from the credit crunch ($bn) 

1600 -1 

1400 - 

1200 - 

1000 - 

800 - 

600 - 

400 - 

200 - 


D Losses to 

D Losses 






capital has been raised to cover losses of $1.2tm, with the US banks 
raising $500bn to cover $600bn in losses and European banks $450bn to 
cover $460bn in losses. 

This suggests that, unless governments are prepared to come in with an- 
other bailout, banks globally will be unable to expand credit for some time 
ahead as they try to raise reserves and capital to meet capital adequacy 
levels. This is the real hit to future economic growth globally. The banks 
will not help economic growth for the next two years at least unless they 
can raise more capital. 

Governments won't be abel to help much more because in developed 
countries they have already put up $1 Itm of taxpayer funds, or one-fifth 
of global output, to support the financial sector. This includes buying up 
toxic assets, recapitalising banks, providing liquidity support, deposit insur- 
ance and loan guarantees — the biggest input of taxpayer's money since 
the second world war 

The Great Recession has been hugely damaging to capitalism. Neverthe- 
less, economic recovery is now ahead — there is light at the end of the 
tunnel for capitalism. 

But for the working class, the Great Recession has a long way to go yet. 
Unemployment is rising sharply. In the US, it has hit 9.7%, the highest 
level for 26 years and is expected to rise above 10% by the end of the 
year. If you include all the people receiving some form of benefit, there 
are 1 5m Americans now looking for work. If you add in all those who 
have given up looking for work, the rate reaches 16%. The US economy 
has lost an unbehevable 3.47m goods-producing jobs since the recession 
began in December 2007. 

About 4.3% of U.S. homes, or one in 25 properties, were in foreclosure in 
the second quarter, the Washington-based Mortgage Bankers Association 
said last month. That's the most in three decades of data, and loans over- 



due by at least 90 days, the point at which foreclosure proceedings typi- 
cally begin, rose to 7.9%, the highest on record. 

America's working class have taken a huge hit. There was an average 
$2000 decline after inflation in real household income in 2008, the largest 
annual drop in 40 years! Real incomes for average Americans are now 
back where they were 12 years ago. And such is the inequality of income 
and wealth in the US, for the bottom 20% of households, the fall has been 
even worse. In contrast, just 25 years ago, the top 20% of American 
households has 45% of all income; by 2008, that share had reached more 
than 50%. 

Because of the loss of jobs and incomes, the number of Americans with- 
out any health insurance has risen even more during the Great Recession 
to reach 46m, or 15% of the population. 

The burden of meeting debt repayments remains at record levels of around 
18-19% of average income, even though interest rates have fallen and 
many of those in still in work are trying to pay down their debts. Accord- 
ing to a recent survey by ACNielsen, Americans are "among the most 
cash-strapped people in the world", with 22% having no money left after 
having paid for essential living expenses. Out of 42 top capitalist nations, 
Americans saved the least. 

The big disaster has been the loss of wealth tied in the value of the homes 
that Americans have bought and in the value of the shares they own through 
their retirement accounts. Since the start of the Great Recession, house- 
hold wealth has plummeted by 20% with $14tm being lost in value; $5tm 
from the value of homes; $6tm in the stock market and another $3tm 
from other investments. 

It is the same story in the UK, where the HBOS bank estimates that an 
average of £3 1,000 per household has been lost in wealth because of the 
Great Recession: £422bn from falling house prices and £393bn from lower 



share prices. This is the first fall since 200 1 . British workers have tried to 
reduce their debts accordingly and been forced to default on their mort- 
gages. Even so, net wealth (after reduced debt) fell 10% in 2008. 

So what sort of recovery can we expect now that the Great Recession 
has bottomed? The optimists of capitalism hope that it will be V-shaped. 
That means they expect that the sharp fall in global output and profits will 
be mirrored in reverse by a sharp recovery so that, by this time next year, 
the major capitalist economies will be growing at 3% or more in real terms. 
The losses suffered during the Great Recession will be quickly recovered 
and it will be business as usual for capitalism. 

This is the 'natural' sort of recovery under capitalism and was experi- 
enced, for example, after the big slump of 1974-5, after which followed 
five years of strong economic growth before capitalism dropped into an 
even deeper slump in 1980. It was also the experience after the shallow 
recession of 2001, which was followed by the strong boom of 2002-07. 
But it may not happen this time. 

In the natural recovery, the recession reduces the cost of production and 
devalues capital sufficiently to drive up profitability for those capitalist 
enterprises still standing. Unemployment drives down labour costs and 
bankruptcies and takeovers reduce capital costs. Businesses then gradu- 
ally start to increase production again, and eventually begin to invest in 
new capital and rehire those in the 'reserve army of labour' without a job. 
This boosts demand for investment goods and eventually workers start 
buying more consumer goods and recovery get under way. 

But such is the overhang of spare capacity in industry and construction 
this time and such is level still of debt owed by businesses, government 
and households alike that this recovery may be stunted. After all, every 
major capitalist economy now finds that it has more than 30% more ca- 
pacity than it needs to meet demand. That is a record high of overcapac- 



ity in industry. Production is going to have to rise some way before new 
investment will be considered. 

It could take the form of a U-shape: what is called a 'jobless recovery' as 
we saw after the recession of 1991-2. In the early 1990s, businesses 
renewed investment slowly and held back from rehiring workers for sev- 
eral years. So economic growth was slow in resuming. 

It could even become W-shaped. There would be a double-dip. The 
weight of overcapacity and debt would be too much to allow the revival of 
consumer spending and investment, so the economic recovery would be 
short-lived and the major capitalist economies would slip back in reces- 
sion. That is what happened in 1980-82. It took two recessions then to 
get things going again. 

Even worse, the recovery could take an L-shape. As in Japan after the 
collapse of the great credit bubble there in 1 989, the economy remained in 
the doldrums for a whole decade. Huge debt has piled up in the banks and 
rather than write these off and cause major bankruptcies and a banking 
crisis, the Japanese government used taxpayer's money to bail the banks 

The square root of recovery — a schematic view of economic growth 

after the Great Recession 

5.0 - 

4.0 - 


3.0 - 
2.0 - 



\ Tpmporary / ^ 

1.0 - 

\ recovery / bovver growth path 
Crisis \ / 

0.0 - 

begins \ / 

-1.0 - 

\ / 

-2.0 - 


c-1 crisis c+1 c+2 c+3 c+4 c+5 

— Growtli - - Pre-crisis average 



out with loans and guarantees. The banks in turn sat on their debts, but 
did not lend money for new investment. This sounds similar to current 

But probably, the recovery will be more like a square root sign. The big 
fall in output is over. Now there will be an upturn. But it will fall short of 
restoring the rate of economic growth achieved before the Great Reces- 
sion. Instead of 3-4% ayear, output in the major economies will be closer 
to 1-2% a year That will not be good enough to restore profitability to 
previous levels. The capitalist system will thus face the risk of a new 
slump further down the road. 

1. IMF Global Financial Stability report, October 2009. 

2. IMF op cit. 



September 2009 CHAPTER FORTY-FOUR 

The bankruptcy of economics 

The Great Recession of 2008-9 may now be over and recovery is under 
way. But capitalism has not escaped. As night follows day, there will be 
another slump. And just as the first simultaneous global recession after 
the second world war in 1974-75 was followed by recovery, it was only 
five years before the capitalist world suffered an even deeper and long- 
lasting slump in 1980-2. 

Of course, the great thinkers of capitahst economics have no idea what is 
going to happen. They were clueless in expecting or foreseeing the Great 
Recession; they have been unable to explain the causes of the slump; and 
they will be equally unable to forecast what will happen now. 

As for an explanation of the causes; again there is confusion. It was due 
to lax monetary policy (cheap interest rates and lavish liquidity) promoted 
by central bankers; it was due to exotic and risky investments that were 
not controlled by the official regulators properly; it was due to bankers 
being paid ridiculous amounts of bonuses that encouraged them to take 
too many risk; it was due to people's greed (as homeowners took on too 
much debt that they could not afford and lenders encouraged and allowed 
them too to make profits). 

All these causes are true, but they are also not the whole or even the main 
truth. Former US Fed Chairman Greenspan, when interviewed for BBC 
Two's The Love of Money series, explained the current economic crisis 
was a "once in a century type of event", and one that he did not expect to 
witness. But he had. 

He now realised, that although capitalism was a great system, it could be 
damaged by human beings! "It's human nature, unless somebody can 
find a way to change human nature, we will have more crises and 
none of them will look like this because no two crises have anything 
in common, except human nature. " 



Greenspan is a follower of the weird and reactionary American philoso- 
pher and novelist Ayn Rand^ who propounded the view that the capitalist 
economic system was perfect if was not for human behaviour, which was 
crass and venal. So presumably what Greenspan means by his remark is 
that human behaviour causes crises — namely, that people are driven by 
greed and fear They get too greedy and take excessive risks, bringing 
everything down and they get frightened and stop spending and investing 
to excessive levels in a climate of fear. There is nothing wrong with 
capitalism except people. Such is the level of understanding about the 
cause of the Great Recession from the 'great and good' sitting at the 
commanding heights of capitalist power. 

Now that the worst seems to be over for the capitalist system, there is a 
bit of soul-searching going on among capitalist economists and strategists. 
How did they fail to forecast this disaster that nearly brought them down? 

There is a crisis in capitalist economic theory. Whether a capitalist econo- 
mist is a 'free marketer', a 'monetarist', a 'neoclassical' supporter, a 
'Keynesian', or even a follower of the so-called 'Austrian school", hardly 
anyone predicted the Great Recession. That is because all these schools 
of economics do not think there is anything flawed in the capitalist mode 

The classical economists of the early 19"' century were much more ob- 
jective. Adam Smith, David Ricardo and Thomas Malthus were among 
the first economists and they quickly identified that capitalism was a trou- 
bled system for organising the production of things that human beings 
used. They had different explanations: but they recognised that capital- 
ism could have crises of its own making. 

Subsequent schools of economics afterwards were apologists. They de- 
nied that there was an inherent problem in the capitalist mode ofproduc- 
tion and its relations between the owners of the means of production 
(money, plant, machinery and raw materials) and the producers of new 
value in production (labour). 



The neoclassical school (after the classical) is the largest in capitalist eco- 
nomics. For this mainstream school, the capitalist system of production 
works perfectly to use up all resources efficiently and get prices for goods 
and labour just right. Thus capitalism can move forward in perfect equi- 
librium and without crises as long as the capitalist market of 'perfect com- 
petition' is not distorted in any way by outside agencies, namely govern- 
ments with regulations and taxes; or trade union ruining the perfect mar- 
ket for labour; or monopolies distorting perfect competition in production 
and investment. 

Over the 25 years from 1982 to the Great Recession, the government's 
role in capitalism was reduced, the trade unions were weakened and mo- 
nopolies were reduced. This explains the great boom in profits and eco- 
nomic growth, say the neoclassical school. Crises were being eliminated 
and anyway would be less damaging. Booms and slumps were over The 
Great Recession could not happen. 

The extreme variant of the neoclassical school were the free marketers 
who believed in what they called "efficient markets'. Capitahsm worked 
best when there was a perfect market where every participant has the 
fullest amount of information about prices and demand and supply imme- 
diately to hand. Such a market would perfect and completely efficient in 
managing resources. 

The best example of such a market was the market for stock and shares. 
The stock exchanges of the world were thus the best indicators of the 
health of capitalism. If stock market prices rose, capitalism did too. What 
could be a greater irony! The most volatile and unpredictable market in 
capitalism was now the standard bearer of successful, crisis-free capital- 
ism — the stock market. 

Not all agree with this Panglossian view of capitalism. A variant of the 
neoclassical school were a group of Austrian economists from the 1930s 
like Kurt Wicksell and Fred Hayek (much adored by the Thatcherite wing 
of the British Tories in the 1970s). The Austrian school accepted that 



capitalism could grow in equilibrium without slump. But crises were not 
because of imperfect' competition, but because of a problem in the mon- 
etary part of the capitalist system. There was a tendency to excessive 
credit that generated 'bubbles' in the capitalist economy that would even- 
tually burst, leading to a crisis of production caused by a contraction of 
credit. Excessive credit was the product of governments and central 
banks being in control of money. Reduce the power of government and 
abolish central banks and let the market decide is the answer of the Aus- 
trian school. 

Some in the Austrian school forecast the credit crunch that preceded the 
Great Recession, but they have forecast disaster every year in the same 
way that weather forecasters say there will be a hurricane in the Gulf of 
Mexico. It's going to happen but when and how damaging, the Austrian 
school could not say. 

The other great school of capitalist economics that opposes the main- 
stream neoclassical school are the Keynesians. The Keynesians saw a 
problem in the circulation of money like the Austrians, but the problem 
was not too much credit, but too little! Again, there was nothing wrong 
with the capitalist mode of production for profit. The problem and cause 
of crisis was that the financial sector held the money. They would squeeze 
the profits of the industrial sector. Interest rates would rise too high. 
Once industrial capitalists were starved of cheap funds to invest, they 
would stop production and investment and the slump would begin. 

The slump would not correct itself automatically, as the neoclassical school 
believed, without the state intervening to provide cheap credit or even to 
invest and spend directly using taxpayer's money. Contrary to the Austri- 
ans, the last thing you should do is cut credit even further and wait for the 
financial sector to recover. 

But again, the Keynesians were absent from any forecast of the Great 
Recession. They saw no crisis coming — on the contrary, credit was 
accelerating, consumers were borrowing and spending up to 2007. In- 



deed all was well. Now the Great Recession has come, they call for more 
credit and more government spending like repetitious parrots. 

Back in the 1980s, an American financial consultant and economist, Hyman 
Minsky- became convinced that capitalism did have a problem. Again 
Minsky did not see any problem with the production process of investing 
for a profit. Again what worried him was the monetary system. Minsl<y 
took Marx's idea of the possibility of crisis inherent in the circulation of 
money and argued financial markets were inherently unstable (the oppo- 
site of the efficient market proponents). 

Because participants in the stock market and other financial markets did 
not have all the information they needed, they were unpredictable about 
their investment decisions. They may not invest; instead they may hoard 
money for a while. That unpredictability could lead to crisis in the circu- 
lation of credit; what came to be called a 'Minsky moment'. Thus the 
cause of the capitalist crisis was a virus that started in the financial sector 
and spread to the production sector of capitalism. 

Minsl<y moments had long been denied by the mainstream of capitalist 
economics. Now they have made a comeback as an explanation for the 
Great Recession, an explanation adopted even by some Marxists^ And 
yet, insightful as Minksy's idea is, it is no more than Marx had explained 
more than 1 00 years earlier. And most important, it did not really forecast 
when such crises of instability would erupt. They may and they may not. 

1. Ayn Rand was Russian/American novelist who developed a 
philosophical system she called objectivism, claiming that the 
reality of human competitive behaviour could not be denied and, 
on that basis, the laisser-faire capitalist economy and egoism 
should be accepted. 

2. Hyman Minsky was an American economist of the post- 
Keynesian tradition, arguing that financial bubbles and instability 
is endogenous to capitalism. 



3. Fred Moseley, Marx, Minsky and Crotty on crises in capitalism, 
October 2007 


September 2009 CHAPTER FORTY-FIVE 

Will there be another slump? 

The leading theorists of capitalism were unable to warn the commanders 
of the capitalist system of the disaster ahead. The leading spokesmen of 
capitalism, the central bank leaders like Ben Bemanke or Alan Greenspan 
before him at the US Fed, or Mervyn King at the Bank of England, saw 
no dangers in the huge rise in housing prices, the massive expansion of 
credit and development of all kinds of new and exotic financial instru- 
ments that the big bankers of the world were dabbling in. 

For example, Bernanke propounded in March 2005 that "increases in 
home values, together with rising stock market value have aided 
household wealth, through cashout refinancing and lines of credit. 
Higher home prices in turn have encouraged households to increase 
their consumption — all these are good things ". 

When the housing boom burst in 2007, Bemanke was quick to deny any 
fallout for capitalism. "We have not seen any major spillovers onto 
other sectors of the economy", he claimed in June 2007. By November, 
when the losses for the banking system began to accrue, Bemanke told 
the US Congress that any losses for the financial system would be no 
more than $50-150bn. They have currently reached $1.6tm and are ex- 
pected to be at least double that ultimately. 

The 'free marketers' were equally unable to see ahead. Robert Lucas, 
the President of the American Economic Association, the body represent- 
ing all capitalist economists, told his audience in 2003, that ''the central 
problem of depression-prevention has been solved" — in other words, 
economies could avoid any recessions from now on. 

Indeed, the economic theory of 'free marketers' was that the capitalist 
economy would avoid crises as long as all the economic agents has per- 
fect information about prices. The stock market was the best example of 
an efficient, perfectly informed market and so if it went on upwards, it 
showed that all was well with the capitalist world. No wonder, the chief 



of the big corporations and investment banks spent their time trying to get 
their stock price up rather than worrying about profitability. 

Indeed, fi^ee marketers argued that capitahsm would always grow in a 
steady and balanced way without crises as long as workers accept the 
rate for the job depending on the rate of growth in value — in other words, 
if capitalists get less profit, then workers should immediately accept less 
wages. If they don't then, they will lose their jobs. It is their 'voluntary' 

Monetarists like Ben Bernanke and the late Milton Friedman reckoned 
that capitalism would always avoid crises as long as central banks provide 
the right amount of money for demand in the economy. Too high interest 
rates and too little 'liquidity' could cause a crisis in production. The policy 
of low interest rates and bounteous amounts of liquidity had created the 
boom of 2002-07 without any risk. 

The Austrian school of capitalist economics argued that you can have too 
much of this good thing: the build-up in credit would mean a bust and a 
sharp contraction later. In that sense, the small number of Austrian econo- 
mists was more aware of a possible economic slump. But, of course, 
their solution was for government spending to be slashed and for workers 
to take big cuts in wages. That was politically unacceptable. 

The Keynesian school of economics had been on the wane before the 
Great Recession. The Keynesians had been dismissed as out of date as 
there was no possibility of a slump as long as capitalist markets were free 
of government interference and regulation, government spending was kept 
down and monetary policy was just right. 

Such was the mantra of most capitalist governments including those of 
so-called socialist persuasion like New Labour in the UK. Gordon Brown 
told all who would listen that the cycle of booms and slumps had been 
broken and that balanced budgets and an independent central bank with a 
prudent monetary policy would do the trick. The Bank of England was 



freed from democratic accountability as the first economic act of the New 
Labour government in 1997. Keynes was dead, theoretically as well as 
literally. Brown went on to argue that such policies had made the UK 
'best-placed' to deal with any ensuing recession that might arise unex- 
pectedly. However, reality has proved to be a cruel corrector 

Between 1980 and 2007, IMF researchers found that there had been nearly 
50 financial crises around the world, a greater figure than in the previous 
30 years and that many of these had led to a collapse in production or a 
slump^ On average, the loss of output was as high as 18% from peak to 
bottom and most lasted around one year. Many capitalist countries had 
repeated crises. Of course, only a few led to general global economic 
recession — the main ones being 1980-2, 1991-2, 2001-2 and now 2008- 
9. So there have been four major world capitalist slumps in the last 25 

Since the Great Recession began, many capitalist economists have sud- 
denly refound Keynes as their mentor This British economist is famous 
for proposing capitalist solutions to crises: namely, low interest rates, mas- 
sive liquidity and if necessary huge public spending to boost economic 
growth if the capitalist sector will not, even if that means big government 
deficits and just printing money for a while. It is this solution that the G20 
government have now adopted. Government deficits are heading well 
above 10% of annual output in many countries and government debt is 
mounting up towards 100% of GDP. 

Ironically, Keynesian economists were no better at predicting a slump 
than the 'free marketers' or 'monetarists. None raised their voices when 
the great housing and credit boom was in full swing. That is because 
Keynesians like the other schools of capitalist economics do not under- 
stand the nature of capitalism and its inherent tendency for crisis. 

What is a capitalist crisis? It appears as a crisis of overproduction. Too 
many goods and services are produced compared to the demand for them. 
In any sane world, we cannot understand how you could ever produce too 



much given the pretty and deprivation in the world and even in the ad- 
vanced capitalist economies. But that's the insanity of capitalism. 

Production is for profit under capitalism and 'overproduction' is when 
production does not produce sufficient profit for capitalists to continue 
producing. That happens when the cost of investing in machinery and 
plant and labour and the cost of maintaining it becomes greater than the 
extra income 'earned' from producing things and services with that in- 
vestment. Or at least the profit is not enough to invest in new capital and 
finance the high living standards of the capitalist class and its hangers on. 

Why or when does profit fall to such a level? It is Marx's great insight to 
show that, as capitalists accumulate capital and appropriate the new value 
created by the labour they employ using the machinery that they own, 
there is a tendency for profitability to fall. Despite many ways in which 
capitalists try to avoid this inexorable tendency, it will exert itself and be- 
gin to drive down profitability. 

Eventually a point is reached when the mass of profits generated by as- 
sets (labour and machinery) that the capitalists own and employ is not 
enough. Then capitalists reduce production, close businesses down, lay 
off labour and write off assets to reduce costs. The rise in unemployment 
and the reduction in wages mean that workers cannot buy as many goods 
and services, while businesses no longer buy so many goods and services 
from other capitalists. In short, there is overproduction relative to de- 

A capitalist crisis will not go on forever. Eventually, the costs of produc- 
tion can be reduced enough to create better profitability for those capital- 
ist businesses still left. And with many going out of business, it leaves 
more of the market for the survivors. In effect, there is a big depreciation 
of costs relative to revenue and profits start rising again. 

That is what is beginning to happen now. Profitability has bottomed after 
a very large fall. Recovery is the order of the day. Will this recovery be 



sustainable? The answer lies in the amount of the depreciation in capital 
values that capitalists have been able to achieve to restore profitability. 

This has been a Great Recession. But even so, it still has not really re- 
stored profitability to levels that could sustain a long boom in capitalist 
production. That's because the size of accumulated capital relative to 
profits remains very high. That can be measured in two ways: first the 
size of industrial capacity (machinery and plant) relative to output. At the 
bottom of this slump, capacity utilisation was as low as 70%. In other 
words 30% of industrial capital is permanently idle and needs to be writ- 
ten off. 

Second, there is still a huge overhang of fictitious capital (debt and loans) 
pressing down on the profitability of capitalist production. A major cause 
of the Great Recession was the buildup of cheap credit (debt) by the 
financial sector of capitalism during the 2000s. Much of this cheap credit 
was invested not in the production of goods and services but property, the 
stock market and all sorts of exotic debt instruments. When the property 
market went bust, it brought down the credit market and the financial 
sector globally with it. 

But even though much of the value of the property market has been re- 
duced (by 30% or more), the debt that financed it has not been paid down 
much. Banks have written off about $2-3tm out of debt assets of around 
$60tm globally, so less than 5%. They still hold trillions of debt that repre- 
sent worthless assets. Before profitability can really be restored, much 
more of this fake value needs to be destroyed. 

However, the reverse is happening. Governments are raising huge amounts 
of debt by issuing government bonds and central banks are printing tril- 
lions of paper money to provide funds for banks and other financial insti- 
tutions to restore their balance sheets — at our expense. The result is 
that most of the debt that triggered the credit crisis remains — but now 
much is on the books of governments, not banks. 



Down the road this debt must be serviced. And it must be paid down if 
the cost of capital is not to rise too much to squeeze profitability. So 
profitability may recover a little now that economic recovery has started, 
but soon it will start to fall again. It will take another slump to reduce the 
cost of capital and reverse the squeeze on profits. That may be few years 
away — probably around 2014. And this slump may be so severe that it 
would make the Great Recession of 2008-09 look not so great after all. 

1. IMF, The anatomy of banking crises April 2008, 


September 2009 CHAPTER FORTY-SIX 

A nasty Turner for the worse 

Lord Adair Turner is head of the UK's Financial Services Authority, the 
body in charge of regulating the banlcs and other financial institutions. He 
is member of the 'great and good' of the British ruling class. He went to 
Cambridge and got a double first-class degree. He worked his way through 
the oil giant BP, the management consultants McKinsey, into Chase Man- 
hattan Bank and then to the head of the bosses organisation, the Confed- 
eration of British Industry (CBI), before he became a director of the now 
taken-over mega investment bank, Merrill Lynch. 

So he knows a thing or two about the global financial sector and the work- 
ings of the banking industry. He certainly partook of the grotesque mega- 
bonuses that bankers and financiers 'earned' during the Great Credit Boom 

Some weeks ago, he was interviewed by Prospect magazine, a small 
mouthpiece of the Blairite wing of New Labour. In that interview, Adair 
blurted out a telling truth about finance capital that its proponents did not 
want to hear. Adair said that "many financial activities which had 
proliferated over the last ten years were 'socially useless'". 

In this, he was ironically echoing the words of Stephen Green, the Chair- 
man of the British Bankers Association, who had said more or less the 
same thing, that "in recent years, banks have pursued short-term profit 
by introducing complex products of no real use to humanity "\ 

The reaction to these comments from financiers has been apoplectic. As 
one guest at the Lord Mayor's Banquet remarked, when Turner reiter- 
ated his comments to the massed ranks of the City of London, "probably 
60% of the people in this room would willingly shoot Turner over that 

One City leader commented on the Prospect interview that he was "ap- 
palled, disgusted, ashamed and hugely embarrassed that I should have 



lived to see someone who commands a senior and important position as 
head of the UK regulatory regime making such damaging and damning 

And Turner went further in his populist attack on his own industry. He 
said the current credit crisis was "cooked up in trading rooms, where 
not just a few, but many, people earned annual bonuses equal to a 
lifetime's earnings of some of those now suffering the consequences". 

Adair defended his position by pointing out that financial services do not 
deliver anything that people can consume, they are just lubricants of a 
capitalist economy — the plumbing of a house if you like. In that sense, 
they add no value. But if the plumbing goes wrong, it is very damaging in 
its impact. 

Turner described the damage: "this was the worst crisis in 70 years — 
indeed it could have been the worst in the history of market capital- 
ism. Real disaster - new Great Depression — was only averted by 
quite exceptional policy measures. Even so, major economic harm 
has occurred. Hundreds of thousands of British people are newly 
unemployed; tens of thousands have lost their houses to reposses- 
sion; and British citizens will be burdened for many years with either 
higher taxes or cuts in public services because of an economic cri- 
sis ". 

Turner warned the bankers: "We cannot go back to business as usual 
and accept the risk that a similar crisis occurs again in 10 or 20 
years time. We need radical change ". 

Hold your horses! What did Turner mean? Is he advocating the end of 
the capitalist system or at least the full and democratic public ownership 
of the banks? No, the bankers could breathe a little. That was not what 
ex-banker Turner had in mind. 



He wants to increase the amounts of back-up capital that banks must 
have before they can lend or invest (although he did not say by how much); 
he wants banks to issue only 'socially usefuF products (whatever they 
might be); and he wants bonuses to be controlled. So his radical change is 
no turner at all. 

The irony is that many of the bankers' weird and exotic financial instal- 
ments that went wrong in the great credit crisis were regarded as very 
socially useful because they supposedly 'reduced risk' or 'hedged risk'. 
Bonuses, from which Turner himself benefited at Merrill Lynch, were 
designed to ensure better performance — and who is to say otherwise? 
As for bank capital, the best way to ensure that banks do the right things 
with our money is for us to own them outright and make them accountable 
to society. 

Turner does not reject capitalism. He told the City bankers that "Adam 
Smith 's insight that good economic results can flow from the private 
pursuit of profit remains valid and vital. " But he cannot help blurting 
out that capitalism is inherently unstable: "it involves rejecting an intel- 
lectually elegant, but also profoundly mistaken faith in ever perfect 
and self equilibrating markets, ever rational human behaviours" . 

So there it is. Capitalism is a system for profit. But it does not work 
because it is not planned and it is not rational. Indeed, it is positively 
damaging to the majority of people. But there is no alternative, so let's 
see if we can regulate it better. Some hope! 




Business as usual 

So, it's business as usual, then, regardless of whether it makes most 
people howl at the moon with rage? Goldman Sachs, this pillar of the 
free market, breeder of super-citizens, object of envy and awe will 
go on raking it in, getting richer than God? An impish grin spreads 
across Blankfein's face. Call him a fat cat who mocks the public. Call 
him wicked. Call him what you will. He is, he says, just a banker 
"doing God's work. " Interview with Lloyd Blankfein, CEO of Goldman 
Sachs, Sunday Times, 8 November 2009 

October 2009 

The big banks in the US and Europe have been announcing mega results 
for the third quarter of this year The banks are once again making money. 
Sure, they are still having to write off losses on the so-called 'toxic' assets 
they held, namely the mortgage-backed securities that have defaulting 
mortgages behind them, or the increasing amounts of defaulting commercial 
and residential real estate and consumer loans that they face as the Great 
Recession bites on households and small businesses. But now they are 
able once again to make profits to cover these losses. 

This is not because the banks are making money on loans to industry or 
individuals. On the contrary, banks are continuing to cut back on lending 
there. Anyway, most large companies do not want to borrow and run up 
more debt. Instead, they have stopped investing in new plant and 
technology and have cut back staff to build up cash balances and pay 
down existing debt. It's only the minnows of industry, the small wholesalers 
and shopkeepers, the tiny engineering and other service companies that 
need to borrow to survive and are finding it impossible to get loans from 
the big banks on reasonable terms. 

So how are the banks making money? It's a combination of two things. 
First, they are able to obtain very cheap money. The central banks of the 
world: the Federal Reserve, the European Central Bank, the Bank of 



England, the Bank of Japan and others have cut the interest rates they 
charge the banks for borrowing to virtually zero. 

At the same time, they have launched massive programmes by purchasing 
the 'toxic' assets of the banks in return for cash. These programmes of 
what is called "quantitative easing' have stuffed the bank's balance sheets 
with cash. This cash is just printed up by the central banks. 

So the big banks have become flush with free money. What have they 
done with it? They have bought government bonds first — something for 
which governments are grateful as they are running huge budget deficits 
that are financed by new borrowing, mainly in the form of new bonds. 
These bonds yield 3-4% a year and have been paid for by the free cash 
given to the banks for their 'dud' assets by the central banks and their 
governments (ie the taxpayers). This is a perfect circle of financial 

But the banks have also started to buy stocks and shares everywhere, as 
well as other so-called 'risk assets' like various commodities (oil, copper, 
wheat, gold etc) and emerging market debt. The prices of these have 
rocketed upwards — the equity rally that began last March has now 
driven up stock market indexes by 60%! This adds to the wealth of the 
banks in their balance sheets. 

So the banks have not returned to their traditional role of taking in deposits 
from workers and businesses, borrowing a bit from each other, and then 
lending the money, as a multiple, back to businesses and households who 
need the loans. Instead, they have become giant hedge funds, betting 
taxpayers money on a rise in the stock market, government debt and 
commodity markets. 

In that sense, it is 'business as usual". The banks have resumed the role 
that they had adopted at the start of the credit crisis in 2007 — betting on 
the prices of financial assets financed through borrowing. So far, it's 
working because governments are financing it all for virtually nothing. 



Governments have done this for two reasons. First, if they had not 'bailed 
out' the banks, then the banking systems of the US, the UK and Europe 
would have collapsed and credit would have dried up. It is debatable 
whether that would have meant the end of the world 'as we know it' and 
engendered a new Great Depression, but certainly that was the fear. 

Consequently, the big banks were given billions, either in the form of the 
purchase of equity capital (shares in the bank), or through the purchase 
of the bad assets on the banks' books or through guaranteeing the debt 
that the banks issued to raise money. Overall, governments and central 
banks provided the equivalent of $ 1 Itm to the banks through these methods, 
or 20% of the world's annual output. 

The other reason that governments gave the banks this financial support 
is that, above all, they did not want to take them into public ownership. 
Sure, even the US government has had to take a share of ownership in 
several banks. But it was very reluctant to do so and tried to avoid it up 
until the last moment. The sheer anger of the electorate made them 
realise that they had to do it. However, at the first possible opportunity, 
these pro-capitalist governments, especially the "centre-left' governments 
of Britain and America, want to return the taxpayers' shares to the private 
sector. They are very happy to go on lending huge amounts to the banks, 
but they don't want to own them. 

This approach matches their previous policy of 'light touch' regulation 
during the great credit boom before it went bust. Governments of centre- 
left or centre-right hues were very keen to let the likes of Goldman Sachs, 
Merrill Lynch, Morgan Stanley, Bear Steams, Lehman's, HBoS and RBS 
take huge risks on betting on the housing market and buying up trillions of 
dollars of so-called asset-backed-securities with no little or no attempt to 
'regulate' the risk. It was 'light touch' before the crisis and now the 
financial crisis has subsided, it will be business as usual. 

It's certainly business as usual for the top bankers" bonuses. With several 
top banks gone bust or taken over, the survivors have now increased their 



market share and are able to rack up bigger profits. Goldman Sachs is 
the world's top investment bank, namely it does not lend money to the 
likes of you or me; it uses its funds and the funds of other institutions to 
invest in stocks and shares, bonds and other financial assets and make 
bets on these markets going up or down. 

In the just reported third quarter of 2009, GS made $3bn profit out of 
$ 12bn in revenues collected. It has repaid the money it borrowed directly 
from the government ($IObn), with interest. But it used that money and 
more to take advantage of financial markets where others had gone bust. 

What is not realised is that GS, just like the other banks, did this with 
taxpayer help. They were able to borrow $28bn guaranteed for any 
losses by the government. Also, when the world's largest insurance 
company, AIG, went bankrupt, they owed, among others, Goldman Sachs 
about $13trn. Normally, creditors are lucl<y to get any money back if a 
company goes back. But GS got paid back in full with government funds. 
The US government was so worried that AIG's collapse would bring 
down the whole pack of cards; it bailed out all the creditors to the tune of 

But the US government was not worried about 'systemic risk' with the 
smaller banks. Apart from Lehman's Brothers, none of the big banks 
were allowed to fail: they were taken over, sometimes in "forced mergers' 
as with Bank America and Merrill Lynch or Lloyds Bank and HBoS in 
the UK. In contrast, hundreds of small banks, often financing the business 
of local communities have been liquidated. To date, 106 such banks in the 
US have gone to the wall. There's one law for the big and one for the 

And that is not so surprising when you notice that the heads of the big 
banks are so closely connected to the heads of the government. In the 
US, the Treasury Secretary Timothy Geithner used to work for Goldmans 
and so did White House economics supremo, Larry Summers. Under 
Bush, former Treasury Secretary Hank Paulson, who arranged the AIG 



bailout for GS and the decision to buy $700bn of 'toxic' assets from the 
banks, used to be the head of Goldman Sachs. 

Overall, GS has got free money worth around $70bn in the last year. It 
has paid back about $20bn of that. But in the meantime, it has been able 
to make over $30bn in profit! What is GS doing with those profits? It is 
paying its bankers and directors around 50% in straight bonuses. This 
year, GS employees will get about $ I6bn in bonuses on top of their salaries 
— at a time when a record number of Americans (32m) are on food 
stamps, unemployment of various sorts has reached 16% of the workforce 
and people are losing their homes. 

Of course, the bonuses won't be shared out equally: some will get more 
than others — indeed, some traders will pocket over $25m in one swoop. 
But that is the essence of Goldman's philosophy, at least according to its 
vice chairman of the international board. Lord Brian Griffiths of 
Fforestfach. As the good life peer of the British House of Lords and a 
practising evangelical Christian, recently put it: "we have to tolerate 
inequality as a way to achieve greater prosperity and opportunity for all". 

Inequality is apparently necessary during this crisis to restore prosperity 
across the board. It is not just the bankers who need more to make 
capitalism work. The heads of the top 100 British companies saw their 
bonuses cut by one-third in 2009 to an average of just £502,000. But they 
still got an inflation-busting 7.4% hike in their basic pay to an average of 
£820,000. Even though their efforts saw their companies produce 20% 
less profit, these chief executives managed to increase their salaries twice 
as fast as their shop floor employees in this Great Recession. 

The Christian Lord , who is also author of a book entitled Morality and 
the Marketplace, did recognise the moral obligation that taxpayer-financed 
GS directors had to the world: "To whom much is given, much is expected 
and there is a sense that if you make money, you are expected to give". 
This call for charitable works by GS has been well expressed in GS funding 
of top private schools in America and in purchasing VIP tables at $22,000 



each for the Formula One motor racing after-race parties. Truly a 
wonderful philanthropic gesture. 

The good Lord was backed up by British Royalty. The grand old Duke of 
York, Prince Andrew, the Queen of England's younger son, complained 
in an interview that he did "not want to demonise the banking and financial 
sector. After all, bonuses, in the scheme of things, are minute. They are 
easy to target. A number will have abused their privilege of a bonus, so 
get rid of the excesses, but don't throw the baby out with the bath water." 

The good prince will be pleased to hear that there is no intention on the 
part of politicians of any bankers' babies being thrown out. There is 
much blather about ending the 'bonus culture' and 'reining in the banks'. 
But it will come to nothing. The British New Labour government is sitting 
on its hands. It does not want to nationalise banks that have all this 
taxpayer largesse and it does not want to 'damage ' the great contributions 
that the City of London makes to budget revenues and to exports with too 
'heavy regulation'. After all, the UK is now a rentier capitalist economy 
that makes more or less nothing useful and increasingly lives parasitically 
off the investment and accumulation of funds deposited it with it by other 
capitahst producer economies. 

The British Conservative opposition party, which is likely to gain power 
after next May's general election, and then introduce swingeing cuts in 
public services to pay for the bankers' bonuses, has proposed that the 
bonuses of high street banks that are supposed to lend to ordinary people 
should pay most of the bonus in shares, not cash. This measure would 
not apply to Goldman Sachs and those who have made the most profit, 
because they don't lend money for business or homes; they just invest 
and speculate. 

The Obama administration is proposing to 'regulate' those banks like GS 
that are "too big to fail" — namely a bank that if it went bust would bring 
down the others. The White House plan is to get these banks to hold 



more cash in reserve and reduce the amount of leverage (borrowing) 
they can do in order to speculate. But that's it. 

Some have proposed, like Mervyn King at the Bank of England, that 
some banks should be broken up between those that just make investments 
(like Goldman Sachs) and those that lend money (like Citicorp or Barclays) 
— you cannot do both, he argues. But that will just make the former 
richer at the expense of the latter. And anyway, governments have no 
intention of stopping the banks doing what they want. 

There is an obvious solution. Bring them all into public ownership and 
make them democratically accountable to the elected institutions with a 
measure of control for the workers in them. Then the top bankers and 
their bonuses can be reined in; then the risk of excessive borrowing and 
speculation can be stopped; then banks can be made to lend money to the 
small businesses and individuals who desperately need it. It seems an 
obvious solution — does it not? But that would not be business as usual. 




What next? 

As I write, the Great Recession seems to have bottomed and economic 
recovery is under way. Several of the mature capitalist economies have 
recorded rises in national output in the third quarter of 2009, while most 
the largest less-developed capitalist economies, like China, India or Brazil 
are already increasing their growth rates. 

The Great Recession was aptly called because the contraction in world 
output had never been as much since the Great Depression years of 
1930-2. But the Great Recession is closer to the simultaneous economic 
slump of 1974-5, which was also steep and confirmed the downward 
trajectory of profitability in the advanced capitalist economies that had 
begun in 1965 and had already bred a mild economic recession in 1969- 
70, just as the downward phase of the profit cycle that began in 1997 led 
to the mild recession of 2001. 

We are now in a downward phase of the profit cycle that should last at 
least until around 20 14. The latest figures for the US rate of profit confirm 
that process. After the peak of 1997, the rate of profit fell to 2001, before 
recovering as a result of the recession then to rise up to 2005, although 
still below the peak of 1997. After 2005, US profitability began to fall, 
culminating in the fall in the mass of profit itself and a drop in the available 
surplus-value going to the capitalist class for consumption. That provoked 
a strike of capital in investment and the start of the Great Recession at 
the beginning of 2008. 

The depth and length of the Great Recession was also the result of the 
massive expansion of fictitious capital in the form of credit (bank loans, 
corporate debt and above all, new forms of credit in derivatives, or options 
to bet on debt prices) \ As soon as the rate of profit peaked in 1997 and 
began to fall, the growth in these new forms of credit accelerated. As 
Marx has explained, once capitalists feel the pressure of falling profitability, 
they look to delay the impact on profits by extending credit. As the return 
on investment in production of things and the creation of real values begins 



to slide, capitalists turn to other investments outside of the accumulation 
process — in this case, speculation in asset-backed debt securities, the 
real estate market and of course, the stock market. 

From 2002 to 2007, the stock market rocketed upwards, trying to get 
back to its peak in 2000, after the bursting of the internet bubble had led to 
a huge fall. At the same time, real estate prices shot up at unheard of 
rates, driven by the cheap credit made available by finance capital hungry 
for high returns. These returns were spread around the financial sector 
through the new forms of credit. The capitalists, particularly finance 
capital, appeared to have never had it so good. They all danced to the 
party that seemed to go on forever. 

But of course, nothing lasts forever and this profit boom was an illusion 
because profitability began to fall again from 2005. As it did, the boost to 
fictitious capital became even more frenzied, until the whole Ponzi scheme 

The Marxist rate of profit in the US and annual global credit growth (%) 


r- 1 

r 18.0 

\ kj l\ 1 \ / 





- 10.0 


f \ ! ' \/ 


\i/ ^/ 




CD— i-NDCA^-Pa^CnCD — lOOCOO— »-roCA3-Pa^Cn05 — 1 

— Rate of profit - LHS - - Credit growth yoy - RHS 




burst in mid-2007. We know the story from there, as this book has tried 
to describe. 

The downward phase of profitability will continue to determine the health 
of the capitalist system. It is not over. As we have argued in this book, 
phases of the profit cycle (and the closely connected stock cycle) last 
around 16-18 years. So the bottom of profitability will not be reached 
until about 2014-15 and the bear market in stocks a little later. 

There is still some way to go before the bottom is reached, even if there 
is a short recovery in profitability over the next few years. This period is 
the 'winter" phase of the Kondratiev cycle of capitalist production, which 
is where the rate of profit falls and the prices of production do not rise 
very much or even fall. Such an era spells depression, weak economic 
growth, low or falling prices and high unemploj'ment. 

The US value rate of profit (VROP) and the organic composition of 
capital(OCC) in the 'seasonal' cycles of of the Kondratiev cycle 

NJ NJ tvj 






The last winter phase was in the Great Depression years of 1929-46. 
Then it took two large and deep recessions in 1930-2 and 1937-8 and 
finally a world war to drive down the costs of capital (both constant and 
variable) to create a more sustainable rising phase for profitability. 

The previous winter phase before that was in the period 1866-84, which 
culminated in a deep slump in the mid-1980s and almost a decade of 
depression afterwards, before profitability and economic growth could be 
sustained and capitalism and the Kondratiev cycle moved into its spring 
'recovery' period. 

If the period we are now going through has been correctly identified, it 
tells you that capitalism has another large recession ahead, probably in 
2014 or so, and unless that does the job in restoring profitability by the 
sufficient write-off of 'excess capital', both fictitious and real, then 
capitalism will stay in depression. Of course, a world war would do the 
job more quickly and more effectively, as in 1940-46, but that is just too 
terrible to contemplate! 

The pro-capitalist governments of the major economies are desperately 
trying to get economic recovery going by pumping in huge dollops of 
credit and taxpayer cash to help the banks and restart investment. This 
will not succeed, except for a very short period of no more than a few 
years, if that. Excess capital in the major economies is still hovering 
around a record 30% and profitability remains well below the peak of 
1997 or 2005. 

Instead, governments are engendering a new credit bubble based on the 
issuance of public sector debt to replace the contraction in fictitious capital 
in the private sector through the fall in house prices, bank assets and 
stock prices. The result will not be sustained economic growth, but a 
brief burst in inflation, rising costs of borrowing that will squeeze capitalist 
investment and then a new bout of stagnation of depression. 



The ultimate truth of capitalism is that profits are its life blood. If profits 
from the accumulation of capital do not return, capitalists will not invest 
and will not produce. Profits can only come from the activity of a labour 
force, using technology to produce things and services. Speculation on 
the stock market and government handouts cannot replace that. Production 
is not for need and is not planned. It depends on profit appropriated by 
capitalists from labour's efforts and realised in a competitive, anarchic 
struggle in markets. Without sustained and rising profitability, there will 
be no new prosperity. 

1. See David Roche and Bob McKee, New Monetarism, 2007 




Measuring the rate of profit 

The Marxist definition of total value is constant capital (c) consumed in 
production in, say one year, plus new value created, divided between vari- 
able capital (v) and surplus value (s). That's c+v+s. 

In bourgeois economic accounting, gross domestic product (GDP) is the 
gross value added by each industry in the economy. Raw materials are 
included in the raw materials industries. The statisticians measure gross 
sales in the various sectors of the economy and deduct inputs (raw mate- 
rials) to reach GDP. So, when aggregated, only the final output net of 
inputs is recorded as GDP. If GDP were to include all the inputs at each 
stage of production, it would be many times larger. 

So total output, or total value added, can be measured as final output from 
all businesses less intermediate inputs going into the production process. 
This is achieved by considering how each business or enterprise adds 
value to the inputs it receives, so that the output of the business is meas- 
ured in terms of the value added by means of its production activities. 

For a single enterprise, value added by production activity is measured as 
gross output less inputs from other businesses less inputs from abroad. 
Summing up the value added by all enterprises, the domestic intermediate 
transactions between businesses cancel out. For the total economy, value 
added irom the production side is measured as gross output less inputs 
from abroad (imports). 

One firm's input is another's output, so the input-output matrix solves the 
problem of double-counting. Of course, there are stocks of raw materials 
built up before and after the production process. The statisticians cover 
these changes in inventories in their measure of GDP. But these are 
relatively small. So the problem of deducting circulating capital or raw 
materials does not really arise. 



Net value added then accounts for the consumption of fixed capital in the 
production process. Net value added gives us new value created in Marxist 
terms, or v+s. We can then find surplus value by deducting employee 
compensation (v) from net value added. 

In my view, it is correct in calculating the overall rate of profit in the 
economy to include all employee compensation including that of unpro- 
ductive workers. Unproductive sectors may not add to new value, but 
they do enter into the average rate of profit for the economy and so must 
be included. 

The productive sectors create the new value which gets transferred to 
the unproductive sectors, so the rate of profit for the economy as a whole 
is thus averaged. So employee compensation for public sector and other 
unproductive layers should be included in variable capital. 

We can get constant capital (c) from net fixed assets (fixed assets net of 
depreciation). If we deduct circulating capital consumed from GDP, we 
must deduct the value of wear and tear and obsolesence (depreciation) of 
fixed assets too. 

I think it is correct to use replacement cost to value fixed assets. The rate 
of profit should be based on the cost of constant capital facing the capital- 
ist at every new moment of production. Using historic cost would offer a 
lower cost that would not be realistic at each production moment. Yes, 
that means prices would have boosted the fixed asset figure each year, 
but that applies to GDP and employee compensation as well. I think Marx 
would agree. 

The fixed asset figure must exclude non-capitalist sectors, because the 
rate of profit is only relevant to capitalists engaged in production and ac- 
cumulation of capital. It is not relevant to include the fixed assets owned 
by government or to include residential assets (houses and flats) in any 
figure for capitalist accumulation. Government employee compensation 
should be in varibale capital, but government fixed assets are not in con- 



stant capital. Similarly, the real estate sector enters into the distribution of 
overall profit and the profit rate in the economy, but people's homes are 
not part of constant capital for capitalist accumulation. 

I would, however, include financial sector fixed assets as part of constant 
capital (some don't) as the sector does add to the process of capitalist 
production, unlike residential real estate investment. As Marx says, the 
circulation part of capital is part of the reproduction and accumulation of 
capital. Within the capitalist sector, however, there are unproductive work- 
ers or sectors. But I don't think you should exclude these as part of the 
cost of variable and constant capital. 

In conclusion, constant capital is net private non-residential fixed assets in 
replacement cost; variable capital is all-economy employee compensa- 
tion. Total value is the net domestic product (GDP less depreciation). 
Surplus-value is the difference between net domestic product and em- 
ployee compensation. Using these concepts, we can get data for the US 
economy for these categories. The US Bureau of Economic Analysis 
provides time series going back to 1929 as follows. Net value added: Table 
1.9.5 Netvalue added by sector; Employee compensation: Table 6.2A-D; 
Net fixed assets, private non-residential: Fixed asset table 4.1. (This 
series deduct depreciation but probably not as capitalists actually do, namely 
with 'moral depreciation' (writing off plant and equipment before their 
physical life is exhausted, but I don't think this is decisive for the overall 
trend results). 

In a paper released just as this draft was being completed, Andrew Kliman'- 
made a thorough analysis of the US rate of profit from 1929 up to 2005. 
In it he argued that there has not been any significant rise in the rate of 
profit from 1982 and it would be more accurate to describe the whole 
post-war period as one where there has been a 'persistent' fall in the rate. 

His measures differ from mine. First, he uses only the corporate sector 
for his rate of profit and so excludes the government sector and the non- 
corporate sector. This removes the bulk of variable capital that the whole 



capitalist system must pay for. I cannot see that this will provide an ag- 
gregated measure of the rate of profit in a capitalist economy. But then 
Kliman reckons it is foolish to try and develop 'a Marxist rate of profit' 
because there is no one agreed way of doing so. So he uses different 
measures for the rate of profit according to different purposes. 

Second, he uses historic cost measures for the net stock of fixed assets 
and not replacement costs. Kliman argues that using replacement costs 
would be wrong as it only accounts for inflation of fixed assets and not for 
the whole economy and thus exaggerates the rise in the rate of profit 
when inflation is low and falling by reducing the rise in fixed assets and 
vice versa. If you want to build in the impact of rising prices at each stage 
of production, you need a monetary measure of labour values, not capital- 
ist market price measures, says Kliman. He prefers to use historic costs 
as a result. Kliman does develop a such monetary expression of fixed 
assets, but shows that the results are little different from historic cost 

In contrast, in a recent paper- Alan Freeman measures the rate of profit in 
a similar way to me. He uses current prices measures of the net stock of 
private fixed assets, as I do, rather than historic prices, to show how the 
rate of profit moves. Fred Moseley has argued that Marx would have 
used replacement costs to measure constant capitaP. In a careful reading 
of Marx's comments on the issue, he shows that Marx assumed constant 
capital was determined by the 'current reproduction costs' of the means 
of production. Moreover, this does not mean that there is a simultaneous 
determination of input and output prices as the neo-Ricardian theory claims. 
Constant capital is still a given monetary amount in the process of accu- 
mulation: it is just that its value will have changed from the previous period 
of accumulation. 

But does using historic costs make much difference to the trends in a 
Marxist measure of the US rate of profit? See the graph below. It shows 
pretty much the same trend in either measure. The golden age period 



peaks in 1965 in both cases and troughs in 1982 in both cases. Again both 
measures peak in 1997 and then recover before peaking again in 2005 at 
a lower level than in 1997. And both show a secular fall in the rate since 
1944. It's true that the replacement cost measure does exaggerate both 
the decline after 1965 and the rise after 1982. But in my view, it does not 
make a decisive difference to the conclusions. 

Kliman also argues that the BEA NIPA figures for depreciation do not 
properly account for moral depreciation. He makes an adjustment to the 
NIPA data for the period after 1982 when the great hi-tech computer 
software revolution began. In adding in more depreciation due to the 
moral force of competition, Kliman argues that this will reduce the rise in 
the rate of profit after 1982. But this argument depends on accepting that 
moral depreciation first cuts profits and only later raises the rate of profit 
when firms write off assets. So I'm not sure it makes much difference to 
the overall results after 1982 and certainly becomes less relevant over 
several cycles of profitability. 

Comparing the historic cost and replacement cost measures of the 
Marxist rate of profit in the US economy 1929-08 (%) 

>^ N.°> 

\'^ \-J \. 

or ,& c>« 


>~^ r^ o5? oSb^ dS? 

K^r kOT ►OJ-^ ►^5-^ ►Ci^^ K^CJ 

3>\ 0>\ 

S^^ N^^ 

o)^' o?> oS^* d?> c\^ 
^ oS> d8> d8> c^ 

<b- ^c,- ^c^ ^ 

— ■ Historic cost measure — Replacement cost measure 



Sticking to my methodology, the very latest data confirm my conclusions 
made over three years ago, namely that the rate of profit has moved in a 
'cycle' of about 32-34 years from trough to trough, with an upward and 
downward phase. We are currently in a downward phase that began in 

The main driver of the rate of profit is the organic composition of capital 
(OCC), vindicating Marx. This is inversely correlated with the rate of 
profit at about two-thirds for the period 1948-07. There is also a clear 
downward trend line in the rate of profit since 1948. This secular decline 
over and above the cyclical movement is probably due to the growth of 
unproductive sectors in the capitalist economy. 

1. Andrew Kliman, The persistent fall in the rate of profit underlying 
the current crisis, October 2009. 

2. Alan Freeman, What makes the US rate of profit fall, MRPA paper 
14147, March 2009. 

3. Fred Moseley, The determination of constant capital in the case of a 
change in the value of the means of production, October 2005. 



Accumulation, the mass of profit 
and capitalist consumption 

The Marxist definition of total value is constant capital (c) consumed in 
production in, say one year, plus new value created, divided between vari- 
able capital (v) and surplus value (s). That's c+v+s. 

In bourgeois economic accounting, gross domestic product (GDP) is the 
gross value added by each industry in the economy, so raw materials are 
included in the raw materials industries. The GDP statisticians take firms 
and industries, calculate their gross sales and deduct inputs (raw materi- 
als). When aggregated, only the final output net of inputs is recorded as 
GDP. If gross output were to include all the inputs at each stage of pro- 
duction, it would be many times larger. 

Total value is thus the gross domestic product less the loss of value from 
wear and tear and obsolesence in the means of production over the period 
of production (depreciation). Thus total value will be net domestic prod- 
uct. Deducting the cost of employing the labour force (employee com- 
pensation) from net product gives you the surplus value created in pro- 
duction by labour and appropriated by the owners of the means of 
prioduction, the capitalists. 

Marx's law of profitability reveals that, as capital is accumulated and new 
value is created by the labour force, the return on capital invested will 
start to decline over time. But the mass of profit can still rise even though 
the rate of profit is falling. Indeed, that will be the case for a long period 
of time, until finally, the inexorable downward pressure on profitability 
drives down the mass of profit. That is the signal for capitalist crisis. 

Such a crisis could come even earlier if the pressure on the mass of profit 
is such that it starts to squeeze the share of surplus value that is siphoned 
off for capitalist consumption^ Capitalists cannot live on air — on the 
contrary, they wish to improve their living standards. But if the mass of 



profit does not grow sufficiently to provide enough both to sustain the 
existing level of investment in new production and enough for improving 
prosperity for capitalists, a crisis can be triggered. Capitalists will reduce 
investment to sustain living standards and thus cause a reduction in eco- 
nomic growth. 

In the example below, the capitalist economy starts off with constant capital 
(C) of 200, variable capital (V) of 100. We assume that the rate of sur- 
plus value on the capitalist investment in variable capital of 50%, or 50. 
So the total value (TV) created in the first year of production would be 

Assuming that the rate of accumulation of constant capital (ac) is 8% a 
year and for variable capital (av), it is half that rate at 4% a year; then 
constant capital will rise 16 in Y-2 to reach 216; variable capital will rise 4 
to reach 104, generating 52 in surplus value to take total value to 372. Out 
of the 52 in surplus value, given our accumulation assumptions, capitalists 
can take out 3 1 for consumption in Y-2. 

Surplus value can thus be broken down into k+ac+av. The rate of profit 
(ROP) is thus k+ac+av divided by C+V. The rate of profit falls from 16.7 
inY-1 to 16.3 in Y-2. Butthe the mass ofprofit or surplus value has risen 
from 50 in Y- 1 to 52 in Y-2 and capitalist consumption has also risen from 
26 inY-1 to 31 in Y-2. 

But as the process of accumulation proceeds over several years, the rate 
ofprofit continues to fall because the organic composition of capital (C/ 
V) rises. Eventually, capitalist consumption (k) stops rising in Y- 12. That 
is the moment of crisis. If capitalist living standards are to be preserved, 
the rate of accumulation must be reduced and investment must be cut 
back and workers sacked. If accumulation were to continue, eventually 
capitalists would have to live on air by Y-29! 

In chapter X on the mass of profit, this process is applied to the US 
economy using the actual data for the economy and projected to 2016. It 




lation, mass of profit and capitalist 




V k 







100 26 







104 31 







108 31 







112 32 







117 32 







122 32 







127 33 







132 33 







137 33 







142 33 







148 34 





Y-1 2 


154 34 





Y-1 3 


160 33 





Y-1 4 


167 33 





Y-1 5 


173 33 





Y-1 6 


180 32 





Y-1 7 


187 31 





Y-1 8 


195 30 





Y-1 9 


203 29 







211 28 







219 26 







228 24 







237 22 







246 19 







256 16 







267 13 







277 9 







288 5 












shows how capitahst consumption slumped in 2009 and will do so again in 
2014 or so. 

1. The whole of the following argument was first developed by Henryk 
Grossman in his book, The law of accumulation and the breakdown of 
the capitalist system, being also a theory of crises, 1929. Grossman 
seems to develop this argument to try and prove that there will be a 
final breakdown of the capitalist system, although once he has in- 
cluded the 'countervailing infiuences ' on the rate of profit, he comes 
up with a more cyclical interpretation of the accumulation process. 





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Brian Berry, Long-wave rhythms is economic development abd 
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Accumulation of capital, 158, 256, 264, 302, 306 

Asset-backed securities, 169-70, 293 

Booms and slumps, iii, 27, 238, 254-5, 277, 282 

Capitalist consumption, 156-8, 263, 311-3 

Constant capital, 35, 38, 99, 132, 149, 156, 248, 305-7, 311-2 

Credit crunch, 223, 225, 229-31, 238, 245-7, 253, 267-8, 278 


Kondratiev, 56-60, 70-1, 73-5, 101, 259, 301-2 

Profit, 42, 47, 49, 51, 53, 55-67, 69-75, 78, 80-2, 91-8, 101-2, 132, 145, 158, 182, 

210-1, 237, 259, 299-301 


Juglar, 65-67, 70-2 

Kitchin, 54, 67, 70-2 

Kuznets, 54, 57, 67, 70-2, 210 
Stock market, 51, 53, 56-7, 63, 69-70, 75, 101, 141 
Depreciation, 35-36, 284-5, 307-9 
Derivatives, 167-8, 180, 204, 253, 315-7 
Disproportion, 263 

Austrian, 59, 61, 120, 147, 276-8, 282 

Classical, 119, 150,276 

Market, 229 

Marxist, 24, 153 

Neoclassical, 276-8 
Employee compensation, 35, 44, 306-7 
Excessive credit, 162, 278 

Fictitious capital, 190-2, 197, 202, 211, 229-30, 238, 264, 285, 299-302 
Finance capital, 50, 113-4, 121, 163, 177, 185,215,218, 231, 253, 287, 300 
Germany, 21, 75, 81-3, 87-92, 102, 107, 203, 221, 265 
Government spending, 21, 92-8, 119, 126, 138, 218, 232-3, 257, 279, 282 
Great Depression, 128, 159, 231-3, 240, 253, 266, 288, 292, 299, 302, 317 
Great Recession, 1, 39, 54, 60, 75, 98, 103, 111, 145, 157, 159, 243-51, 264-73, 275-9, 

282-6,291-295, 299 
Gross domestic product, 305, 311 
Historic costs, 308 
House prices, 9-19, 21, 25, 61-3, 115, 117, 125, 127-8, 165, 169, 171, 173, 176-81, 

183-4, 191, 194, 199-200, 210-2, 223-4, 237-9, 257, 271 , 302 
Industrial disputes, 95-6 

of income, 108, 121, 136-9, 255, 270 
of wealth, 136, 140 
Japan, 6, 21-2, 72, 79-84, 91-2, 102, 106-7, 114-6, 141-3, 161-2, 181-5, 189, 203, 212, 

221, 231-2, 242-3, 255-6, 272, 291, 316 
Moral depreciation, 307-9 
Net domestic product, 311 
Organic composition of capital, 30-42, 48-9, 55, 77-89, 99-100, 130-2, 150-2, 155, 158, 

Overproduction, 242, 256, 261-4, 283-4 
Ponzi scheme, 174, 229, 239, 247-8, 300 
Productive labour, 45, 56, 211 

Profit, rate of , 169-72, 193-6, 206, 218, 224, 235, 244, 251, 277-8, 313-4, 315, 319-26 
Marxist, 33-42, 78-83, 155, 180, 308-9 

Value, 33-42, 70, 79, 100, 155, 264, 301 


Profit, mass of, 45, 66, 130, 155-8, 179, 233, 256, 263, 299, 311-3 

Replacement costs, 308 

Surplus value, mass of, 156 

Surplus value, rate of, 30, 57, 79, 82, 85, 158, 312 

Temporal single state interpretation, 152 

Underconsumption, 261-3 

Unemployment, 3, 6, 17, 41, 65-9, 78-82, 91-3, 116, 120, 123, 185, 192, 194, 205, 212, 

216, 226-7, 241-4, 265, 271, 284, 294, 301 
Unproductive labour, 44-5, 56 
United Kingdom, 
United States 

Variable capital, 29-30, 34-5, 66, 87, 99, 149, 155-6, 248, 262, 305-8, 311-2 
World trade, 87, 105,266